Wednesday 25 April 2018

Irish bailout provides little relief for markets

The €85bn bailout of Ireland is doing little to stabilise sovereign credit markets after bond yields in the euro region’s most-indebted countries rose to records last week.

European governments sought to stem market losses by agreeing to the aid package for Ireland and also by endorsing steps on post-2013 rescues that scale back calls by German Chancellor Angela Merkel for bondholders to take losses and share the costs with taxpayers.

“It is always about confidence and this should be enough to restore a degree of confidence in Ireland and in particular Irish sovereign debt,” Charles Diebel, head of market strategy at London-based Lloyds TSB Corporate Bank, wrote late yesterday in a note to clients.

“It doesn’t, however, address the underlying issues of monetary union without fiscal union and thereby Portugal-Spain risks remain.”

Irish 10-year government bonds climbed today before the gains were erased, with the yield now up 7 basis points at 9.41pc. Portuguese, Spanish and Italian debt also fell, and the euro dropped to the lowest level in more than two months.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments held near a record 188 basis points, according to CMA.

Swaps on Spain rose 14 basis points to an all-time high of 334. Portugal climbed 23 basis points to a peak of 524, while Ireland declined 5 to 593.

Spain and Portugal

“The real issue for the euro is that the tension around Ireland has seen broad-based contagion effects, including to Portugal and Spain,” Jens Nordvig, a New York-based managing director of currency research at Nomura Holdings Inc, wrote today in a note to clients.

Market speculation intensified last week that Portugal and perhaps even Spain will require external support after Ireland.

A bailout of Portugal would cost about €50bn, which is “well within the capacity” of funds made available by the European Union and the International Monetary Fund, Nordvig said.

“The additional resources needed to fund Spain in a scenario where Spain lost market access would test the limits of the capacity available from the EU-IMF,” or about €385bn, he said. “This is the reason Spain is pivotal to the outlook for the euro.”

The yield on Spanish 10-year bonds rose 14 basis points to 5.35pc as of 12:06pm in London, the highest since 2002.

That pushed the extra yield investors demand to hold the securities instead of benchmark German bunds to 261 basis points, within 4 basis points of the euro-era record.

Portuguese 10-year yields rose 9 basis points to 7.23pc and similar-maturity Italian bond yields increased 11 basis points to 4.54pc.

Credit markets were tested today by a €6.8bn sovereign bond auction in Italy. Borrowing costs rose after the sale. Portugal, Belgium, Germany, Spain and France also plan to sell debt this week.

‘Under pressure’

“Volatility is going to persist and I wouldn’t rule out a further widening of spreads in the near term,” said Nicholas Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd, a broker for money managers.

“The euro system as a whole is under pressure and there’s huge political pressure on its members to hold the region together.”

Spanish Economy Minister Elena Salgado said yesterday her country won’t need aid. She said steps taken by European finance ministers will help control speculation in the financial markets.

The Spanish economy is the fourth largest in the euro zone and is almost twice the combined size of Portugal, Ireland and Greece.

As part of yesterday’s talks with EU officials, Greece was given an extra four-and-a-half years to repay emergency loans totaling €110bn to match the seven-year term of Ireland’s deal. Greek bonds rose, sending the yield down 13 basis points to 11.78pc.


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