Friday 22 September 2017

EU chiefs discussing bond buyback plan to halt crisis

Credit default swaps fall as markets view the move as positive for Europe

Donal O'Donovan

Donal O'Donovan

BOND insurance on Europe's

deficit-ridden nations was rallying the most on record on

speculation policy makers will let governments buy back their

bonds at a discount to avoid restructuring their debts.

The Markit iTraxx index of credit-default swaps on 15 countries fell 15.75 basis points this week to 177.25, following a 26.5 basis point drop in the previous period.

That's the biggest two-week decline since the index was created in October 2009, surpassing the 35.25 basis point drop a month after regulators announced a €750bn package to bail out the region's indebted nations.

European leaders are debating proposals including boosting the rescue fund as investors speculate more nations will need bailouts. Allowing "struggling countries" to buy back their bonds using funds from the €440bn European Financial Stability Facility to reduce their debts is also being considered, according to UniCredit.

Borrowing costs in the market for Ireland and other stressed countries fell through most of the week.

The yield, or interest, on Ireland's 10-year government bonds, fell from a high of 8.88pc on Wednesday to 8.6pc by the end of the week.

In Greece, the cost of borrowing dropped half a percent between Wednesday and Friday, to end the week at 11.17pc.

The drop in yields demanded to hold the bonds comes in spite of media reports that the European Commission could back radical measures to cut Greece's debt, including buying back bonds at discounts in the market or from the European Central Bank (ECB).

The ECB has spent €76bn buying government bonds well below face value since last May.

It could, in theory, sell the bonds back to Greece or Ireland at the same discount, allowing the countries to reduce their overall levels of debt, if the countries had funds to finance the deals.

There is now little prospect of investors having hard news on any eurozone rescue plans for investors to consider before european finance ministers meet again on March 24 and 25.

Until then rumours and speculation on possible buybacks and other schemes will be a real driver of market sentiment. Borrowing costs for Spain and Portugal also fell through the second half of the week.

In contrast, German's borrowing costs continued to rise for much of the period and have hovered close to 3.2pc for much of the week.

Germany's borrowing costs are up on the perception that any move to increase the scale of Europe's financial rescue tools ultimately falls back on Germany to finance.

On Friday, while yields for riskier countries dropped, German bond yields edged higher ending the day at 3.17pc for 10 year government borrowing.

Irish Independent

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