G20 debt crisis meeting boosts markets
Published 15/10/2011 | 05:00
IN the money markets, hope triumphed over experience last night. Markets rose as political leaders met to discuss the economic crisis yesterday.
In the bond market, traders shrugged off a ratings downgrade of Spain and talks of 50pc losses on Greek loans as the market lapped up suggestions that the European bailout funds could be used to protect bond investors from losses.
The latest speculation in the bond markets focuses on using the bailout cash to provide a partial guarantee of any new debt issued by European countries in the money markets.
The theory is that a guarantee that is never used is a cheap alternative to the rescue fund buying bonds itself, while investors would gain confidence to lend to countries like Italy and Spain if the bailout funds agree to absorb the "first loss" on bonds in the event of a default.
Like the Irish bank guarantee, the theory may not hold water in practice but the idea gained traction yesterday, helping limit the effects of S&P's downgrade of Spain's government debt.
S&P cut the rating one notch from AA to AA-, and blamed weakened growth as well as the rising cost of borrowing for the cut.
On Friday the euro ended its best weekly run against the dollar since the start of the year as the Group of 20 finance ministers met for a two-day meeting on the debt crisis in Paris.
The positive tone spread to equity markets, with shares in the US and Europe closing up yesterday.
Shares rose as the talks got under way in Paris. This was despite the fact that the current meeting is just the latest in a series of set-piece discussions where hopes for a breakthrough to end the 18-month-long debt crisis remained unfulfilled.
The euro rose 0.6pc to US$1.3859 yesterday -- up 3.5pc over the week.
This is the best gain since January.
The single currency also rose against the Japanese yen, while the yen fell against the dollar.