Irish, Portuguese Yield Spreads at Record Over Germany on Banking Concern
Irish and Portuguese government bonds fell, pushing the yields on 10-year securities to records versus benchmark German bunds, on concern European banks are vulnerable to losses on their holdings of so-called peripheral euro-region debt.
The extra yield investors demand to hold Greek 10-year government bonds rather than benchmark bunds reached the highest level in four months. Pacific Investment Management Co. fund manager Andrew Bosomworth said yesterday the Mediterranean nation faces a “substantial” default risk when its bailout program expires in three years. The Wall Street Journal said European stress tests of major banks understated some holdings of sovereign debt in the wake of Greece’s budget crisis.
“You have to be an adrenaline junkie to be very active in those markets,” Frances Hudson, head of global thematic strategy at Standard Life Investments, said in an interview in London today, referring to the debt of peripheral euro-region nations. “We aren’t heavy in any of the peripherals. It’s obvious people are going to buy German bunds for safety.”
The German-Irish 10-year yield spread was as wide as 380 basis points, the most since Bloomberg started compiling the data, from 343 basis points. It was at 372 basis points as of 4:41 p.m. in London.
The Portuguese-German spread reached 356 basis points, also a record, from 333 basis points. The Greek-German 10-year yield spread reached 948 basis points.
Soaring Spreads
Concern some European nations are struggling to narrow their deficits sent the German bund yield to a record low and widened the spreads for the bonds of the most-indebted nations soaring. The Greek-German spread reached a record 973 basis points on May 7, the day before the European Union and International Monetary Fund crafted a region-wide bailout package to ward off investors betting on the break-up of the euro.
Standard & Poor’s cut Ireland’s credit rating last month to AA-, the lowest since 1995. S&P cited the rising costs to bail out institutions such as Anglo Irish Bank Corp., which was nationalized after the nation’s property boom went bust.
German lenders including Deutsche Bank AG need to raise about 105 billion euros ($134 billion) to reach an estimated 10 percent Tier 1 capital ratio, a key measure of financial strength, Dirk Jaeger, who is responsible for regulatory topics at the Association of German Banks, said yesterday.
A default by Greece could trigger the collapse of banks with large sovereign-bond holdings, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich.
‘Evaporation of Trust’
“A default by one EU country would lead to an evaporation of trust in banks,” he said. “If investors aren’t willing to invest in banks anymore, then many banks will go bust in months, not years.”
Greek Prime Minister George Papandreou reshuffled his Cabinet for the first time, naming a health chief and demoting an economic official. Finance Minister George Papaconstantinou retained his post.
Papandreou’s reshuffle before November local elections seeks to address popular dissatisfaction as incomes dwindle and inflation accelerates. The economy is set to shrink 4 percent this year and the government is enacting a three-year deficit- cutting plan in return for a 110 billion-euro bailout from the EU and IMF.
Belgian 10-year bond yields stayed near the highest in more than three weeks as the country’s politicians struggled to form a government after talks collapsed. The 10-year yield was little changed at 3.02 percent. It reached 3.07 percent yesterday, the most since Aug. 16.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.
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