Article first published as European Debt Crisis Deepens, Spreads to More Countries on Blogcritics.
Ireland bailout worth 85 billion Euros could not convince the markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, debt costs of Portugal, Spain and Belgium have touched life time high levels in euro’s 12-year history. Late on Tuesday ratings agency placed Portugal on credit watch over its huge debts, signalling the next country to ask for joint aid from the EU and IMF would be Portugal as per BBC News.
Portugal’s central bank warned about the risks being faced by its banks. Failure of the Portugal government in consolidating public finances may lead to Portugal banks to face intolerable risks, the central bank warns. France already came forward saying it will support to help Portugal and Spain if such a need arises. Financial officials in France and Germany accused investors for acting irrationally on the threat of financial contagion.
The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. Bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and Irish bond yield stood at 9.53% while Portuguese bond yield stood at 7.05% for 10-year bonds. However, the yields for governments bonds of these countries are reportedly lowered on Wednesday on speculation that the European Central Bank would take extra measures to save Euro from falling, Reuters reported.
Article first published as Portuguese Expensive Bond Sale Hints Bailout Need on Technorati.
Portugal’s latest bond auction was successful on Wednesday, but the yield offered for 1-year bonds has risen sharply, indicating that market is losing confidence in Portugal economy. The sale of 500 million euros worth 1-year bonds was oversubscribed by two and half times. The yield rose to 5.3%, which is too expensive for 1-year bonds. The previous sale of 1-year Portugal bonds yielded 4.8%. Moreover, some of these bonds might have been bought by Portuguese banks, funded by European Central Bank.
As usual, Portugal’s Prime Minister Jose Socrates reiterated that his country did not need outside help. What his country needed was confidence in its economy, he added. S&P rating agency placed Portugal on credit watch citing its huge debt. S&P said Portugal had not done enough to increase its labour flexibility and productivity, which means, Portugal has to decrease wages of the workers.
The yield for 10-year Portuguese bonds fell slightly on Wednesday, but remained at historically high level of 6.85%. However, the yield on German bunds that are considered the safest among the Eurozone countries remained at 2.67%. The difference between yield of German bonds and the yield on any particular country’s bonds is called bond spread of that particular bond of that country. This bond spread is widening day by day for the most indebted countries of the Eurozone despite huge bailouts offered to those countries.
Irish bailout, still not known how much is planned, failed to alley market worries as debt costs for Ireland, Spain and Portugal continued at high levels. However, most of the European share indices along with that of the US were up, with positive news from the US data.
Jobless claims in the US came down slightly comparing with the previous week. Yesterday, the US revised up its third quarter growth rate from 2% to 2.5%.
The yield on Irish government’s 10 year bond was 8.92%, a record level reached before the bailout talks began. Though Irish government is not going for debt sale as it is fully funded up to the first half of next year with EDB funding, it is still a matter to worry. Because, it denotes that the markets are losing confidence on Ireland’s capacity of repayment of its debt.
The yield on 10 year Portuguese bond was 7.8%, which means the bond spread relative to the German bund was 4.8%. The Spanish-German 10 year bond spread recorded at 2.6% a life time high for Spain.
Bloomberg | Jul 15, 2010
Investors bought all 3 billion euros ($3.8 billion) of 15-year bonds offered by Spain, with demand strong enough to ease concern the nation would struggle to cover debt payments after Greece’s bailout. “The Spanish auction went well,” said Chiara Cremonesi, a strategist at UniCredit Research in London. “Appetite for Spanish paper is alive.” Spain, which has to repay 24.7 billion euros of debt this month, has the third-largest deficit in the euro region and its banks are dependent on the European Central Bank for funds. Prime Minister Jose Luis Rodriquez Zapatero, risks losing power as he pushes through austerity measures including cutting workers’ wages, freezing pensions and reducing severance pay. Today’s auction raised the maximum offered at an average yield of 5.116 percent, compared with 4.434 percent at a sale of the same securities on April 22, the Bank of Spain said. Demand was 2.57 times the amount sold, compared with the bid-to-cover ratio of 1.79 in April. Spanish bonds rose and the euro strengthened. The government is hoping the publication of stress tests next week will allow its financial institutions to access capital markets. Spanish lenders borrowed a record 126.3 billion euros from the ECB in June, up 48 percent from the previous month, according to data compiled by the Bank of Spain. That compares with a drop of 4 percent to 496.6 billion euros for euro-area lenders as a whole.
The yield premium investors demand to hold Spain’s 10-year debt over comparable German bonds fell to 199.6 basis points after the auction, from 211 basis points earlier. The euro gained 0.4 percent to 1.2792 against the dollar. “People who expected the end of the world in July because of the redemptions have been proved wrong,” said Gianluca Salford, a fixed-income strategist at JPMorgan Chase & Co. in London. Spain’s auction follows Greece’s sale of Treasury bills on July 13, its first since the country accepted a three-year bailout plan from the European Union in May after its borrowing costs surged. Greece secured an interest rate at that sale below the 5 percent charged on the emergency European loans.
BBC News | Tuesday, 13 July 2010 | 09:13 GMT
International ratings agency Moody’s has downgraded Portugal’s sovereign debt rating, citing worsening public finances and weak growth prospects. It cut the rating by two notches from the maximum AA2 to A1. And it said Portugal might need further austerity measures, as well as those already announced. The euro fell against the dollar and sterling but market reaction was muted. Rival agency Standard & Poor’s already rates Portugal two grades lower at A-. The downgrade means that the rating agency is losing confidence in the Portuguese government’s ability to meet its financial obligations.
A sovereign debt downgrade tends to make it more expensive for a government to raise money on the international markets. However, the bonds are still some way from the “junk” status suffered by Greece. The latest available figures show Portugal’s total government debt stood at roughly 77% of GDP at the end of 2009. This is quite similar to the numbers in countries such as France and Germany, two of Europe’s economic powerhouses. However, Portugal’s economy is significantly smaller in absolute terms and is not expected to revive any time soon. Continue reading
Washington Post | May 2, 2010 | Sunday
When European leaders laid the foundations of the European Union with the 1957 Treaty of Rome, they spoke optimistically of an "ever-closer union," a "pooling" of resources and "concerted action" to bring the diverse nations together. The problem is that the Europeans have never, to this day, been willing to accept the consequences of this assertion of unity. They wanted a single currency but refused a common fiscal policy that could keep the books balanced; they wanted a common flag but rejected a Europe-wide constitution; they desired the benefits of community but not its limitations or responsibilities. This tapestry of European integration, woven so nobly by the post-World War II generation, has been fraying over the past decade. Last week you could hear it begin to rip at the seams as Germany and other financially strong nations struggled to decide whether to rescue Greece, their weakest and most profligate member.
The seriousness of the European crisis is illustrated by the fact that there are no good solutions to the Greek mess. The short-term fixes that investors are clamoring for would carry significant long-term costs. What’s worse is that the institutions that could create a framework for long-term stability don’t exist and aren’t likely to be created now. What makes sense, in theory, is to let the Greeks default on their debts, decouple from the European monetary union for long enough to restructure their economy, and then rejoin the union on a more honest and sustainable basis. As one hedge fund manager warns: "Investors had always regarded the euro as a de jure German deutsche mark; it is dawning on the world that it is becoming, de facto, a Greek drachma." The one-size euro obviously doesn’t fit all members.
BBC News | Friday, 12 March 2010 | 23:22 GMT
Portugal’s parliament has approved an austerity budget aimed at cutting its deficit to the level permitted for countries using the euro currency. The government hopes that by reducing the country’s debt it will also restore investor confidence. Prime Minister Jose Socrates described the vote as a political victory for the country. But trade unions have threatened to strike over plans for a public sector wage freeze and pension cuts. There have been concerns that Portugal could run into the same trouble as Greece, where an enormous budget deficit has unsettled financial markets. "This is the budget the country needs," Mr Socrates said after the vote.
The minority socialist government has portrayed this year’s budget – and a medium-term austerity programme yet to be submitted to parliament – as key to restoring Portugal’s credibility with investors. The budget foresees a cut in Portugal’s public deficit by one basis point to 8.3% in 2010. The government says it wants to return to below the EU-mandated