Saturday 16 December 2017

EU debt now more risky than that of top US firms

Interest rates kept at record 1pc low as Greek tragedy continues to play out

Jean-Claude Trichet, president of the European Central Bank, addresses the media during his monthly news conference at the ECB
headquarters in Frankfurt yesterday
Jean-Claude Trichet, president of the European Central Bank, addresses the media during his monthly news conference at the ECB headquarters in Frankfurt yesterday

Brendan Keenan

EU government debt is now seen as more risky than that of top US companies, as the crisis sparked by budget problems in Greece shows no signs of abating.

Traders jacked up the cost of insuring against the governments of Greece and Portugal not repaying their debts after Portugal apparently failed in attempts to borrow €500m in short-term loans at acceptable interest rates.

European Central Bank (ECB) president Jean-Claude Trichet reversed last month's criticism of Greece, saying he was now confident it could get its budget deficit under control.

"We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal," Mr Trichet said after the expected ECB announcement that interest rates will remain at the record low of 1pc.

The Markit iTraxx SovX Western Europe Index of credit-default swaps, which is linked to 15 European governments, rose above that of a benchmark tied to 125 leading US companies.

Although the comparison is "apples and oranges", the move "symbolises how credit risk has been transformed from corporate to sovereign risk, as the solution to the financial and economic crisis was government intervention," Bank of America analysts said.

Credibility

Credit default rates soared again, with the huge movements indicating the degree of risk seen by markets. Swaps on Portugal soared 0.31pc to 2.27pc, while contracts on Greece jumped 0.325pc to 4.3pc and Spain increased 0.13pc to 1.65pc.

"Something has to happen to turn credibility around," said Paul Mortimer-Lee, head of market economics at BNP Paribas in London. "The market's just saying it's not believable. It might have to get worse before it gets better."

Credit default swaps on Irish Government bonds climbed by just under 0.1pc to 1.72pc. This was a much smaller rise than in the three other countries with large deficits, but Spain's rates are still lower than Ireland's.

Mr Trichet said the actions taken by the Government were "impressive". Nomura political analyst Alastair Newton said Ireland was seen as having done well. "But I'd be reluctant to assume that because of that, the same will carry across to other European countries. The main lesson of Ireland is one that can't be repeated -- that it's best to start early."

Greece's biggest union yesterday approved a second mass strike this month to protest the spending cuts, and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.

Irish Independent

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Promoted Links

Also in Business