Posts Tagged ‘European Central Bank’

Yippee! Another European Stress Test Festival!

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, Quantitative Finance, Technology, Views, commentaries and opinions on 20.01.11 at 04:46

EU finance ministers have Wednesday agreed on the broad outlines of another stress tests on major European financial institutions. I’m not really sure what happens during an European Stress Test, but it seems to make a lot of people happy. Perhaps it’s some kind of big party – like a festival, or something.  Anyway – I’m sure it will be fun.

“The euro zone debt crisis could last another ten years.”

Gyorgy Matolcsy

And this years stress test will be even better than last year, when they somehow forgot to invite the Irish, the prominent people of Brussels promise. But, like last year, the organizers are not sure if they will tell us all about it, or not.

Please forgive the sarcasm, but if the new European Banking Authority is going to be taken just a little bit serious, the stress test has to be conducted with total transparency.

Nothing less will ever be able to restore the lost confidence in this maneuvers.

“We are going to draw the lessons by making the next tests more rigorous and even more credible,” says internal market commissioner, Michel Barnier, at the end of a two-day meeting between Europe’s economy chiefs in Brussels.

The new stress tests will this time also take into account underlying capital, liquidity and exposure to sovereign debt.

In July last year, the financial strength of 91 institutions was tested against potential crisis situations. Only seven failed the examination.

The methodology this time, which will imagine even more severe crisis situation, notably in property markets, has yet to be agreed upon, but will be undertaken by the new European Banking Authority, with ministers expecting the tests to be completed by the end of May.

The level of disclosure once the results are concluded however remains a point of division amongst ministers.

The new test comes as Portugal, currently in the euro zone’s sovereign-debt emergency room, sees increased pressure on its bond yields, with rates climbing on 10-year bonds to 6.951 percent, shy of the seven-percent level thought to be the tipping point for the country to request a bail-out.

Meanwhile on Tuesday, the Hungarian EU presidency enjoyed renewed opprobrium from other member states when the country’s finance minister made the gaffe of publicly saying the euro zone debt crisis could last another ten years, the reports.

Mr. Gyorgy Matolcsy made the comments during the public, televised portion of the meeting of EU finance ministers.

There is a likelihood “that the euro is endangered for another decade,” he says.

Well, that’s just what I pointed out in my commentary on New Years Eve.

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EU To Increase Bailout Fund, Brussels Demands More Austerity

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 13.01.11 at 02:13

EU economics and monetary affairs commissioner Olli Rehn calls for a substantial increase of the European bailout fund ahead of the meeting between European finance ministers next week. Mr. Rehn also issue a stark warning about all the deficit-slashing austerity measures that European states have so far imposed – it is not enough.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change.”

Olli Rehn

Well, there is one thing the EU leaders absolutely not is lacking, and that is ambitions.  The economics and monetary  commissioner is asking for Europe to embrace structural reforms to bring an end to the debt crisis – by the end of this year.

“We need to review all options for the size and scope of our financial backstops – not only for the current ones but also for the permanent European stability mechanism too,” EU economics and monetary affairs commissioner Olli Rehn writes in an article in the Financial Times Wednesday.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change,” he writes.

The commissioner, who calls for Europe to embrace structural reforms to bring an end to the debt crisis this year, wants to see changes to tax and benefit systems, reform of labor markets and pension provision, a loosening of business regulation and more investment in innovation.

“This calls for a comprehensive response by the whole EU and for bold fiscal and structural measures in all member states.”

He issued the call ahead of the unveiling of the European Commission‘s first annual growth survey, essentially a template with spending recommendations for EU member states, published as part of an effort to bring European-level coherence to national budgetary plans.

The EU member states are already considering an increase in the effective lending capacity of European Financial Stability Facility (EFSF).

While the EFSF kitty amounts to €440 billion, as more countries become borrowers from rather than guarantors of the fund, the actual capacity of the fund currently sits at roughly €250 billion.

Some governments favor a hike in the effective lending capacity to the full €440 billion, while others are looking to a doubling of the fund.

Member states are considering expanding the role of the EFSF to permit the common purchase of government bonds, an exercise which is currently the competence of the European Central Bank.

According to EU sources, any decision on the matter hinges on the result of government bond auctions this week, particularly Portugal’s trip to the market, reports.

Mr Rehn told reporters Wednesday that “rigorous” cuts and “structural reforms” were necessary for Europe to emerge from its ongoing debt crisis and return to growth.

“Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscous circle of high unemployment, high debt and low growth,” he said.

Adding the following warning: “Without intensified fiscal consolidation across member states, we are at mercy of market forces.”

(Now, that’s also an interesting perspective!)

The commission says that “bold” and “resolute policies” are needed to turn around weak projected growth of around 1.5 percent for the EU over the next ten years and 1.25 percent for the euro zone.

Brussels wants to see further cuts to budgets in 2012 on welfare reform – including more conditionality attached to benefits, and a raising of the “premature” retirement ages.

Labor markets should also be made more flexible and “strict and sustained wage moderation” should be maintained.

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2011 Key European Issue: Politicians And Politics

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Technology, Views, commentaries and opinions on 11.01.11 at 02:11

According to The Economist Intelligence Unit (EIU) will European politicians and lawmakers come under heavy pressure in 2011, as the politics become more confrontational and creditor countries’ willingness to sustain financial support is fading away. New austerity measures will be implemented and trigger a new wave of social unrest. It’s looking more and more like a worst case scenario, but at least the responsibility for the whole mess is about to be put in the right place.

“It cannot be ruled out that Europe will witness its first sovereign defaults since 1948.”

Economist Intelligence Unit

If a sovereign default should happen, it would put huge strains on banks’ balance sheets, potentially triggering further bank recapitalization in core euro states, EIU argues. “The EU economy has revived somewhat following an unprecedented contraction in 2008-09, but the recovery will remain faltering and uneven, with some countries recovering pre-crisis output levels quickly and others suffering long and painful adjustments,” the analyst concludes.

This is the key remarks by the EIU-analysts in their 2011 report:

* Euro crisis.

The sovereign debt crisis will continue to cast a shadow over the euro zone, and doubts about the single currency’s long-term survival will not easily be assuaged. Policymakers are slowly coming to terms with the fact that the survival of the euro area cannot simply be taken for granted and will depend on careful management of current stresses in the bond markets and weak banking systems, as well as reforms to fiscal governance and more determined efforts to tackle structural problems. Our core forecast is that the euro zone will avoid collapse in 2011, but there are likely to be more than a few uncomfortable moments. We expect that Portugal will be forced to access the EU/IMF financial stability fund, while Spain will need to roll over about 21% of its public debt in 2011, in addition to financing a budget deficit of over 7% of GDP. Financial-market jitters could resurface for many reasons, but a particular concern would be if investors became fundamentally convinced that the EU/IMF fund, nominally worth $750bn (US$990bn), was inadequate to bail out those countries needing assistance. Spain probably won’t need to request a bail-out, but the size of its economy means that any doubts on this front would present a particular risk to euro zone stability. The European Central Bank (ECB), meanwhile, by purchasing government bonds, has stepped into politically controversial territory and is likely to find it increasingly difficult to step back.

* Austerity.

The need to reduce large budget deficits will remain an obvious challenge for many members of the euro zone, and also for the UK. In 2011 austerity will become more visible in European countries as cuts in public services and pay bite. Economic conditions will also be rendered more difficult by the fact that the drivers of the global recovery in 2010 will have largely faded. A key question will be whether the supposed “cure” for fiscal ills will do the “patients” more harm than good by undermining economic growth so much that fiscal ratios worsen or, at least, fail to improve as much as policymakers had hoped. Moreover, if fiscal tightening starts to jeopardize the recovery, it may tempt governments to defer necessary austerity measures. The UK will prove a good test-case in this regard. The coalition government’s dramatic five-year fiscal consolidation programme comprises a mix of tax rises and the deepest sustained period of real-term public spending restraint since the 1940s. We remain of the view that policymakers are over-estimating the ability of a structurally weak private sector to drive economic activity as austerity bites, which could see the government facing the dilemma of either choking off the recovery or risking a rapid shift in investor sentiment by backing away from its fiscal targets.

* Social unrest.

Deep spending cuts and tax rises could have serious detrimental impacts on social and political stability. Sacrifices have been and will continue to be demanded of all those receiving salaries, pensions or other benefits from the state, while unemployment among public-sector workers is likely to increase. Greece in particular has been facing ongoing strikes against government austerity measures, by both public- and private-sector workers. We expect widespread industrial unrest to continue, but do not expect unrest to undermine the government’s efforts to rein in its budget deficit significantly. Political stability in Ireland will be significantly tested. So far, Irish citizens have accepted two years of austerity budgets with little protest. But the prospect of deeper cuts in the years ahead as demanded by the EU/IMF as a condition of Ireland’s $85bn rescue is likely to inspire social unrest. Dangers of social strife in other EU countries exist, but are lower than in the case of Greece and Ireland. Portugal has already undergone a long period of austerity and weak growth. Spain is only at the beginning of a period of public-sector tightening, but is over two years into a recession caused by a collapse in its property market (as well as the international financial turmoil) and has seen unemployment rise to over 20%, double that of most other countries, without so far experiencing anything worse than disciplined and peaceful protests. In France, recent trade union strikes to protest against an overhaul of the state-pension system served as a reminder of the potential for protests to cause significant economic disruption and trigger outbreaks of rioting. The government is likely to delay any further controversial reforms ahead of the 2012 elections. Trade unions in the UK are also expected to stage strikes as the scope of the government’s public-sector cuts become clearer. Comparatively tight legal restrictions on the ability to strike in the UK (in contrast to many other EU countries) will help the coalition to some extent, but we think that the scale of social unrest will prove to be considerably greater and more widespread than is currently assumed.

* Political relations.

The most important bilateral relationship in the EU is between Germany and France, both because their reconciliation laid the foundation of EU integration, and because they are the two largest euro area economies. As the political dynamics of the ongoing sovereign debt crisis demonstrate, Germany’s role in Europe is now more central than it has ever been. We expect Germany to maintain its commitment to the euro, but it’s increasingly assertive promotion of its national interest and reluctance to discuss the issue of macroeconomic imbalances within the euro area could trigger wider tensions. Relations between Chancellor Merkel and President Sarkozy have long been difficult and as discussions over how to hold the euro area together continue, frequent shows of unity are likely to be undermined by fundamental disagreements on crucial matters. There is a risk that relations could deteriorate. In general, French attitudes to the EU have become more sceptical in recent years, as the increase in the EU’s membership has reduced France’s influence. Mr Sarkozy may be able to point to the reform of financial regulations as evidence that the EU is developing in line with France’s aims, but the sovereign debt crisis has also increased the likelihood of a clash with the EU over the poor state of the French public finances.

* State aid.

Given how dependent many financial institutions are on national government and ECB assistance, the removal of the panoply of support measures (including liability guarantees, infusions of capital, government purchases of impaired assets and cheap central bank funding) might precipitate the failure of institutions and a further bout of financial panic. As a result, the phasing-out of support will be gradual. At the same time, efforts will continue to reconstruct internally those financial institutions that are being buttressed by government support. Having waved through all rescue packages at the height of the panic, the European Commission is now reasserting itself. It has already imposed large-scale downsizing on some banks, and more are being scrutinised. From the start of 2011, all financial institutions receiving state aid will be obliged to submit restructuring plans to the Commission (whereas previously this requirement was restricted to banks receiving support above 2% of their risk-weighed assets). The Commission’s active intervention is justified on the grounds that institutions that require state aid cannot be allowed an advantage over those that have survived unaided.

* Financial reform.

The implementation of a revised regulatory architecture for financial institutions will be high on the agenda, at national, EU and international levels. At the level of the EU, in September 2010 member states and the Parliament approved a major reform of the EU’s financial supervisory framework that will enable the creation in January 2011 of a European Systemic Risk Board (ESRB), responsible for macroeconomic supervision, and three new bodies to oversee the supervision of banks, insurers and securities markets throughout the EU. European supervisory authorities (ESAs) will be charged with developing and helping to enforce a common rule book and reinforcing day-to-day supervision by national authorities. There is still considerable scope for any recommendations and decisions to be overturned by governments on the grounds of national budgetary competences. However, together with the new ESAs for the banking sector, the ESRB is likely to have considerable influence over future measures to counter the build-up of risk in the European financial system, such as capital boosts, counter-cyclical capital buffers or maximum loan/value ratios.

* EU budget.

The common agricultural policy (CAP), an elaborate mechanism to maintain prices of agricultural goods, was central to setting up the EU’s forerunner more than half a century ago. Although it has been reformed to be less market-distorting and costly for European taxpayers, many members wish to see further reforms designed to diminish EU intervention, whereas others are adamantly opposed. Recent extreme volatility in food prices and concerns about security of supply have strengthened the latter grouping. The CAP currently accounts for just under half of the total EU budget. Negotiations on how the CAP will be structured and funded for the next budgetary period (2014-21) will be time-consuming and contentious. Although the EU budget accounts for a mere 1% of member states’ combined GDP, and is unlikely to rise above this level, the amount that each member contributes generates some of the bloc’s most divisive and protracted disagreements. The next negotiations, which are already under way, will be at least as difficult as any before owing to the historically large deficits that many member governments are facing. The UK is leading a charge to cut the budget and wants the majority of savings to be found in cohesion funds, while maintaining spending on the CAP (which will please France and Germany). This will be fiercely resisted by newer, poorer member states from central and eastern Europe.

Greece was the first country ever to default in the year 4 BC. I looks like Greece is going to do it again, ups….

And a quick look at how the spreads on Irish Credit-default Swaps are moving, I think the Economist-people safely can replace their “ifs” with “when’s.”

But, you know, they are Economists.
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WikiLeaks: The Diversion of A Decade?

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Natural science, Philosophy, Technology, Views, commentaries and opinions on 06.12.10 at 20:54

There’s a lot serious stuff going on in the world at the moment. But somehow the center of attention is a young man who has managed to piss of some politicians and generals by publishing documents that proves what most people already know – or at least suspected. The WikiLeaks founder Julian Assange is now subject to the most intense manhunt by international authorities since Osama bin-Laden for having sex without a condom. The fact that a stack of reports have been issued, warning about further deterioration of the global economy, currency wars, political instability and exploding social unrest, seems to be mostly overlooked. Am I the only one to  think it’s a little peculiar?

“The WikiLeaks saga is trying its best to offer distraction, but the crisis in the euro zone remains impossible to ignore.”

Robin Bew

It’s been a strange, almost surreal, weekend. Personally I’ve been fighting off a couple of attempts to hack into my computer system, and never in the 15 years I’ve been online have I ran into so many error messages when trying to load pages on the internet. What makes it even more strange is that the WikiLeaks frenzy is happening at the same time as EU and NATO is conducting its first ever cyber war exercise, the US launch a massive operation to seize close to hundred file-sharing web sites and thousands of hackers all over the world gathered at an event organized by Google, Microsoft, NASA and the World Bank.

And all this have been planned long time ahead. The latest release of documents from WikiLeaks was also notified months in advance.

So was the scheduled release of several economic forecasts for 2011 last week. However, these have more or less been drowned in the avalanche of more or less (un)important Wiki-stories filling up both mainstream and alternative medias.

So, I think it’s time to get the focus back where it belongs; on the developments of our global economy, as the Eurogroup meet for another crisis meeting this Monday and Bloomberg reports that the euro’s worst is yet to come.

“The WikiLeaks saga is trying its best to offer distraction, but the crisis in the euro zone remains impossible to ignore. With fears of contagion increasing, our ViewsWire service examines scenarios under which countries might exit the single currency,” chief economist Robin Bew at The Economist Intelligence Unit writes in an email to subscribers. Adding: “We think the euro will ultimately survive, but significant political and economic hurdles will have to be overcome, with Portugal now likely to follow Ireland and Greece in requesting emergency EU/IMF funding.”

Last week EIU released a bunch of reports, based on separate analysis on each topic.

You have to look very hard to find something positive to hold on to. In fact, I can’t remember having read anything like this from The Economist in a very long time.

This is the headlines:

The EIU label the three first predictions with “High Probability,”  the next three as “Moderate Probability” and the two last are seen as “Low Probability”.

As I’ve been pointing out since the financial crisis became visible to most people, we are in fact dealing with a three-part crisis; the financial, the environmental and the social.

There three problems are connected, they interact with each other, feeds on each other, making each other stronger – and it’s impossible to solve one without solving the others.

Robin Bew writes:

“The UN climate summit under way in Cancún, Mexico is highly unlikely to produce a global accord on emissions cuts, though modest gains, such as on forest protection, remain possible.”

Well, the possibility of rescuing a few trees is not gonna make much difference.

As for the social (poverty) crisis, Economist Intelligence Unit concludes:

“The risk is that instability becomes systemic, with political crises in certain countries affecting others through contagion or through the actions of populist new regimes seeking to assert themselves. Potential widespread disruption poses a considerable downside risk to the Economist Intelligence Unit’s global economic forecasts.”

That’s right. Sovereign debt problems isn’t the only thing that is contagious.

The Economist Intelligence Unit‘s baseline global forecast assumes some increase in social and political unrest, but with serious fallout largely avoided. If economic circumstances were to worsen again, however, there is a danger though that incidents of unrest turn into far more intense and long-lasting events: armed rebellions, military coups, civil conflicts and perhaps even wars between states. In such circumstances, a repetition of the pressures that transformed global politics in the 1930s, though a far-removed worst-case scenario, could not be dismissed.”

In other words: If the economy gets worse, we may face a World War II scenario.

Now, take a look at the top three scenarios again…

First: Sovereign debt

“There are considerable concerns about the sustainability of public debt positions in a number of countries. Heavily indebted sovereigns – including developed economies, notably in the euro zone – could struggle to raise private financing even at higher interest rates, and some could default.”

“The US and the UK also face drastically increased fiscal deficits. They could moderate their debt burdens through inflation and devaluation but this risks undermining their bond markets, and the resultant spike in bond yields could force an acceleration of fiscal tightening, with highly negative implications for economic recovery.”

“Emerging-market defaults would create some ructions more widely, but as developed-country sovereign bonds have traditionally been considered risk-free, developed-country defaults in particular would wreak havoc on investor psychology. Banks would face write-downs on their government debt portfolios, and financial-sector guarantees by governments that default would be exposed as worthless.”

(Forecast: High probability, high impact, risk level 16)

Second: New Asset Bubble

“A flood of cheap money from stimulus measures, in particular carry trades drawing on record-low interest rates in the US, prompted a strong rally in a range of assets in the second half of 2009 and in 2010, particularly emerging-market stocks and bonds, but also in risky asset classes such as equities, high-yield bonds and commodities more broadly.”

“New bubbles could continue to grow for a considerable period of time, potentially several years, during which they will help to boost growth in the economies concerned. But they would burst suddenly, and still-fragile risk appetite could be a factor in this – a decline in risk tolerance could see investors pull their money out of emerging-market assets. Indeed, the rally in asset markets has been subject to periodic reversals in 2010 as concerns about the outlook for the global economy have re-emerged.”

“New asset bubbles may be vulnerable to painful corrections as central banks in emerging markets tighten monetary policy, fiscal stimulus is withdrawn, and the weak foundations of recovery become apparent. The resultant dislocations, including a shock to banks and a renewed rise in risk aversion, would reinforce and deepen a new economic slowdown.”

(Forecast: High probability, high impact, risk level 16)

Third: Currency Manipulation

“Tensions are rising over attempts by some countries to weaken their currencies, and the US and China remain at odds over the value of the renminbi. A global “currency war” would raise the danger of protectionist responses.”

“Tensions over exchange-rates have risen in recent months. The US Congress has been holding hearings on China’s exchange-rate policy, with a view to potential legislation to punish China for what the US regards as a mercantilist strategy of keeping the renminbi artificially low. A growing cohort of other countries are also worried about the strength of their currencies, including Brazil, Switzerland, Japan and South Korea. Market interventions by policymakers in some countries to weaken their currencies prompted Brazil’s finance minister, Guido Mantega, to warn of an “international currency war”.”

“Given the closely integrated nature of the global economy, governments will find it difficult to close off many aspects of trade, even if they want to. But trade disputes are likely to increase as populist policies clash with countries’ international obligations.”

(Forecast: High probability, high impact, risk level 16)

All eight summaries are uploaded on Scribd.

By the way – here’s the latest WikiLeaks stories:

WikiLeaks founder Julian Assange arrested in UK (BBC)

Feds block workers from WikiLeaks (

MasterCard pulls plug on WikiLeaks payments (

Swiss Bank Closes WikiLeaks Founder’s Bank Accounts (RadioFreeEurope)

WikiLeaks‘ Swedish servers come under attack again (The Herald Tribue)

Barack Omama Is More Dangerous Than WikiLeaks (American Enterprise Institute for Public Policy Research)

WikiLeaks Releases List of “Vital” US Facilities (

Google refuses to disclose whether they’d allow users to repost Wikileaks‘ State Department cables (The Atlantic)

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Finally, Trichet Show Some Fire Power

In Financial Engeneering, Financial Markets, International Econnomic Politics, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 03.12.10 at 03:49

As expected, the ECB had a pivotal role in determining spreads direction today. However, it didn’t turn out quite as smooth as the market was expecting. The  surprise followed soon after Jean-Claude Trichet‘s  press conference.

“It soon became clear that central banks were aggressively buying bonds, bringing to mind Trichet’s recent warning not to underestimate the ECB.”

Gavan Nolan

ECB president Jean-Claude Trichet did confirm that the ECB would delay its exit from its non-standard liquidity measures;  the three-month LTROs would remain in place until at least Q1 2011 and the other MROs until at least April 2011. This was welcomed by the markets, but it would have been a major surprise if wasn’t announced. The real surprise followed soon after the press conference.

The first reaction to Jean Claude Trichet‘s press conference was one of disappointment after the ECB president failed to provide a firm indication that the central bank was to step up bond purchases.

But soon it became clear that central banks were aggressively buying bonds, “bringing to mind Trichet’s recent warning not to underestimate the ECB,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

“Portugal and Ireland government bonds were the main focus of the buying, with reports of some purchasing of Greek bonds also in circulation.” Nolan points out.

And the actions of the ECB caused the Markit iTraxx SovX Western Europe to whipsaw violently in a frenzy trading session.

The index was as tight as 182 basis points this morning, before widening sharply to 190 bp’s in the immediate aftermath of Trichet’s words.

Then rallied sharply to 180 bp’s when the scale of ECB bond buying became apparent.

“The rally in banks was even more emphatic, with the Markit iTraxx Senior Financials index reaching 145 bp’s, some 17 bp’s tighter than yesterday’s close,” Nolan reports.

Iberian banks, which have underperformance of late, were among the strongest tightening credits. This pulled the Markit iTraxx Europe tighter in a corporate market where only a few defensive names widened.

“The focus will now turn to tomorrow’s economic data, with non-farm payrolls, Markit PMIs and ISM Services,” Nolan concludes.

Adding: “But the ECB’s actions haven’t solved the sovereign debt problems, and some investors will already be wondering when the issue of solvency, rather than liquidity, will be addressed.”


  • Markit iTraxx Europe 106.5bp (-6.5), Markit iTraxx Crossover 473.5bp (-30)
  • Markit iTraxx SovX Western Europe 180bp (-11)
  • Markit iTraxx Senior Financials 145bp (-17)
  • Sovereigns – Greece 885bp (-43), Spain 290bp (-26), Portugal 450bp (-32), Italy 214bp (-16), Ireland 550bp (-20), Belgium 182bp (-10), France 92bp (-4)


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Cover Your Shorts, Baby!

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 02.12.10 at 03:53

Credit spreads bounced back Wednesday, driven by a strong short covering rally in sovereigns. The strong tightening of spreads was triggered by comments from ECB president Jean-Claude Trichet at the European Parliament yesterday, where he hinted that the central bank’s bond purchase programme could be extended. The markets are aware that the EU’s policy levers are limited, and are looking for the ECB to do more.

“The expectation that it will do so at its governing council meeting tomorrow led to many investors scrambling to cover their short positions.”

Gavan Nolan

The Securities Markets Programme (SMP), launched in May, has been sterilised by extracting liquidity out of the system elsewhere, and it is highly unlikely that this policy would change. But a significant increase in the scope of the programme – along with a possible extension of unlimited 3-month ECB funding into next year – would be welcomed by investors.

“The expectation that it will do so at its governing council meeting tomorrow led to many investors scrambling to cover their short positions,” credit analyst Gavan Nolan writes in Wednesday’s Markit Intraday Alert.

A “better-than-expected” Portuguese T-bill auction also helped support the rally.

The sovereign sold $500 million of 12-month bills and the bid-to-cover ratio of 2.5 could be seen as a relatively healthy, given the volatile conditions.

However, the sovereign had to pay a higher yield but that was to be expected.

Aside from the now ubiquitous sovereign turmoil, investors were also focused on several important economic releases.

European markets woke up to another strong HSBC/Markit Manufacturing PMI. The headline index was up to 55.3 in November, with new orders up to a seven-month high.

“On the negative side, input price inflation was the fastest since July 2008, stoking fears of further monetary tightening,” Gavan Nolan writes.

Leading indicators in Europe also pointed towards a strengthening in growth.

“The Markit Eurozone Manufacturing PMI rose to a four-month high of 55.3 in November, slightly below the earlier flash estimate but still well above the neutral 50 level. However, the data showed that this is a recovery led by the core of Germany and France, with the peripherals lagging well behind,” Nolan points out.

Adding: “The equivalent PMI for the UK was even more impressive. The index rose to 58 in November, its highest level since September 1994 and significantly above the 55.4 reading last month. The coalition government will have been pleased by the expansion in exports, though whether this can be maintained over next year is open to question.”

The US ISM Manufacturing index completed the picture. The November report showed the index rising to 56.6, down from last month but still firmly in expansion territory.

“Economic data is likely to take a back seat tomorrow as investors await the ECB’s announcement,” Gavan Nolan concludes.

Spreads tightened sharply in late trading on further short covering.


  • Markit iTraxx Europe 112.5bp (-5), Markit iTraxx Crossover 503.5bp (-22)
  • Markit iTraxx SovX Western Europe 190.5bp (-12)
  • Markit iTraxx Senior Financials 161.5bp (-10)
  • Sovereigns – Greece 925bp (-31), Spain 315bp (-52), Portugal 475bp (-71), Italy 228bp (-43), Ireland 570bp (-44), Belgium 190bp (-14), France 95bp (-10)



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The Brilliance Of A Bailout

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 30.11.10 at 16:32

The European Central Bank tried to force Ireland into an EU/IMF bailout, according to Irish Justice Minister Dermot Ahern. Today the ECB is forced to buy Irish bonds in the market to prevent the recently bailed out country’s economy from total collapse. And at the same time the ECB is increasing the bailout pressure on Portugal. Excuse me, but I can’t see the logic.

“The government was cleaned out in the negotiations.”

Michael Noonan

While the 111 billion dollar rescue package to Ireland was supposed to calm the financial markets, the exact opposite has happened. The volatility and the cost of insuring national debt by Credit-default Swaps is just getting higher and higher. Yesterday we saw the biggest slide in Spanish government bonds since the euro’s debut in 1999. Today the ECB is intervening in the market to keep Irish bonds from going down the tubes.

According to two anonymous sources, the ECB have bought a “small amount” of short time Irish government bonds Tuesday morning, Bloomberg reports.

The yield on Irish 2-year bonds are up by 0,14%, as of 1 PM (CET) today.

The cost of insuring Portugal against default rose 11.5 basis points to a record 551 today, according to CMA prices, and the ECB is now putting pressure on the Portuguese government to apply for a bailout, according to the Irish minister Dermot Ahern.

“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, into making an application, throwing in the towel before we had even considered it as a government,” Ahern says in an interview with the Irish state broadcaster RTE today. Adding: “And if you notice, they are doing the same with Portugal now.”

Asked about who was pressuring Ireland, he says: “Quite obviously people from within the ECB.”

Ireland’s crisis has forced the ECB to buy government bonds and pump money into its banking system.

Irish domestic lenders increased their reliance on ECB funding by 3.3 percent in October and the central bank today purchased more Irish bonds, according to two people familiar with the transaction, Bloomberg reports.

The bailout has sparked a wave of domestic criticism accusing Prime Minister Brian Cowen of giving up the country’s sovereignty for punitive terms.

More than 50,000 people took to the streets of Dublin on November 27, the day before the government agreed an average interest rate of 5.8 percent for the loans from the EU and IMF.

“The government was cleaned out in the negotiations,” says Michael Noonan, finance spokesman for Fine Gael, the largest opposition party.

“The interest rate of 5.8 percent is far too high and verges on the unaffordable.”

The Irish Bailout - Illustrated


The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s 750 billion-euro bailout fund may not be big enough if the country resorts to aid. Spain’s 10-year government bonds slid yesterday by the most since the euro’s debut.

The extra yield investors demand to hold the securities instead of benchmark German bunds widened to euro-era records.

(See also: Belgium Joins The PIIGS: And Then They Were Six)

“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”

The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup’s chief economist, Willem Buiter, wrote  in a note to investors yesterday. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said.


10-year sovereign spreads (against 10 year German bunds)

Previous Day Close Yesterday’s Close This morning
France 0.459 0.521 0.535
Italy 1.753 1.993 1.998
Spain 2.538 2.787 2.746
Portugal 4.484 4.564 4.477
Greece 9.299 9.329 9.79
Ireland 6.866 6.966 6.956
Belgium 1.013 1.214 1.192

Related by The Swapper:

Another Sunday – Another EU Crisis Meeting

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 28.11.10 at 14:35

The “Informal” Eurogroup and the ECOFIN are meeting today, Sunday, at the EU headquarter in Brussels.The informal group meeting officially starts at 15 PM (CET) , the ECOFIN meeting is set to open at 16 PM. On the agenda is, among other things, the final approval of the Irish bailout. (Please, don’t ask me how an informal group can approve an official international bailout!)

The Informal Euro Group

It’s not clear whether the meeting will be broadcasted LIVE, or not. If it does, I’ll add a link here on this page. However, several of the EU ministers made short comments when they arrived on doorstep at the EU headquarter in Brussels earlier today.

Here’s French finance minister Christine Lagarde:

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Here’s Belgium’s deputy prime minister, Dider Reynders, making comments before the Eurogroup and ECOFIN meeting on 28 November in Brussels:

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Elena Salgado, Deputy Prime Minister and Minister for Economy of Spain, made the following remarks when arriving Brussels:

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Wolfgang Schauble, federal minister for finance of Germany arriving in Brussels:

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Vice Chancellor and Federal Minister for Finance of Austria, Josef Prôll, comments at the arrival in Brussels before today’s Eurogroup/ ECOFIN meeting:

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One of the last to arrive Brussels this Sunday is UK’s Chancellor of the exchequer of the United Kingdom, George Osborne:
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