The turmoil in the market for sovereign bond is now clearly spilling over to the corporate sector, and particularly into the financial industry. The banks perceived by investors as the weakest, are getting their insurance premiums kicked up by a substantial amount of bp’s, that in turn raises the banks funding costs, and not every bank in Europe has a wealthy tipple-A government to back them up. According to the German Die Welt Online is the EU commission ready to double the EUR750 billion bailout fund that was established earlier this year. I think I see the QE3 on the horizon.
“This topic is one to watch over the coming days.”
Gavan Nolan
Given the recent turmoil with Ireland, Portugal and Spain, several EU leaders are now considering a significant increase of the euro zone’s 750 billion euro rescue fund. According to Die Welt Online Thursday, the EU commission have already suggested to double the fund. The German government, the ECB and the Bundesbank have spent the day trying to put out the fire.
Die Welt also writes that Germany – the economically strongest member of the European community – is rejecting the plans, at least the time being.
After the Irish bailout, the focus is now mainly on Portugal and Spain.
Both countries are under heavy financial pressure these days as their CDS spreads just keep getting wider. This has led investors to doubt that the 750 euro bailout mechanism – The European Financial Stability Fund – that was rushed through the EU parliament earlier this year will be enough to cover even Spain alone if they should ask for help.
In response to questions in Paris Thursday president Alex Weber of the German Bundesbank said: “If the amount is not enough, we can increase it.” Adding: “An attack on the euro has no chance of success.”
I can’t help wondering who these evil attackers of the euro is? The Chinese?
Mr. Weber’s statement might also be interpreted as another way of saying: “We’ll print as much money as we need.”
Die Welt reports that the rest of the fund – assumingly 440 billion euro – could be claimed in the coming months by other countries in the euro area.
Spanish banks have been among the worst performers in recent weeks amid fears over the sovereign’s strength.
“The Markit iTraxx Europe is now 8.5 wider since this time last week and has returned to the levels seen at the beginning of October. Considerable widening in bank spreads, driven by sovereign credit deterioration and talk of burden sharing, has played a major part in the index losing ground,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.
Given the Thanksgiving holiday in the US, it was no surprise to see this trend continue today.
Sovereigns were buffeted by headline risk – no change there.
Brian Lenihan, Ireland’s finance minister, insisted that the crucial December budget would be passed by parliament. But the coalition government’s slender majority is expected to be reduced by one if it loses a by-election today, as predicted by the polls. And Enda Kenny, leader of the opposition party Fine Gael, pledged today that he would not be bound by the recent austerity programme.
“Ireland received another blow when LCH Clearnet announced that it would be increasing its margin requirement on the sovereign’s bonds from 30% to 45%, the third rise such rise in as many weeks,” Nolan notes.
Ireland’s spreads widened beyond 600 bp’s Thursday, before recovering later in the session.
German officials, perhaps mindful of their perceived role in exacerbating the current crisis, had a very busy day, trying hard to support the alleged economic recovery.
Angela Merkel stressed that the existing European Financial Stability Fund would not be changed before it expires in 2013.
“German ambiguity around this issue has contributed to the recent widening,” Gavan Nolan at Markit points out.
“There have been rumours that the EFSF would be increased in size, and this topic is one to watch over the coming days,” he concludes.
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- Markit iTraxx Europe 107.5bp (+0.5), Markit iTraxx Crossover 483bp (+1)
- Markit iTraxx SovX Western Europe 180bp (0)
- Markit iTraxx Senior Financials 157bp (0)
- Sovereigns – Greece 950bp (-22), Spain 301bp (+1), Portugal 480bp (-2), Italy 204bp (+2), Ireland 585bp (+4), Belgium 151bp (+2)
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Algorithm&Blues 
Brian Cowen, Dermot Ahern, European Central Bank, European Union, Government of Ireland, Ireland, Michael Noonan, Portugal, Republic of Ireland
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 16:32The 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
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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.
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10-year sovereign spreads (against 10 year German bunds)
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