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RBS’s Cailloux Foresees More Sovereign-Debt Woes: Tom Keene

Investors are retrenching for another round of the European sovereign-debt crisis, according to Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc.

“We saw a short-term relief rally on the back of a low level of recapitalization needed, on the back of sovereigns needing less of their funding to shoulder the banking sector, but medium-term, these issues remain,” he said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “Markets are still challenging the idea that these economies are going to be able to grow themselves out of the debt overhang.”

After a 750 billion euro ($960 billion) bailout for the weaker economies in the euro zone, investors remain skittish about sovereign debt of some nations and the banks that hold the region’s government bonds. The European bank stress tests two months ago did not alleviate concern because in many cases, official results differed from those published by the individual banks, raising questions about the comprehensiveness of the results, Cailloux said.

The gaps between 10-year German bond yields and those of Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to the widest since May. Germany’s banking association said yesterday that the nation’s banks need to raise $135 billion and Pacific Investment Management Co. said Greece still faces “substantial” default risk.

The market continues to price in a 60 percent chance of Greece defaulting, Cailloux said. The cost of protecting against losses on Greek government debt roses 24 basis points to 892 as of 10:54 a.m. in New York, according to data provider CMA. A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

“I’m not sure the headwinds are going to disappear over the short term,” Edinburgh-based Cailloux said. “The periphery still seems to be exposed to these confidence swings.”

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