Irish Relief Fleeting as ‘Day of Reckoning’ Nears: Euro Credit

Irish Relief Fleeting as ‘Day of Reckoning’ Nears
Pedestrians pass an "Irish Aid" sign on O'Connell Street in Dublin. Photographer: Paul Thomas/Bloomberg

Borrowing costs for Europe’s most indebted nations are at record highs as Ireland’s capitulation in accepting a bailout of its banking industry stokes concern that other countries also will have to seek aid.

The average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.57 percent today, a euro-era record. The average premium investors demand to hold those securities instead of German bunds widened to as much as 492 basis points, the highest level of 2010. The average cost of insuring against default by the five nations using credit-default swaps reached a record 517 basis points on Nov. 23.

“It’s no longer taboo to speak about a restructuring,” said Johannes Jooste, a portfolio strategist at Bank of America Corp.’s Merrill Lynch Global Wealth Management in London, which oversees about $1.4 trillion for clients. “The fact that bond yields continue to rise and put pressure on countries that have to fund from the market makes investors less and less confident, and it’s bringing forward the day of reckoning.”

The Nov. 22 relief rally after Irish Prime Minister Brian Cowen conceded that the nation needed financial support proved transient. Irish 10-year bond yields fell 4 basis points, before jumping 104 basis points as of 3:13 p.m. in London today, exceeding 9 percent for the first time since 1995. The euro’s respite was more fleeting; the bailout inspired a 0.8 percent gain for the currency before it slumped to a two-month low. It fell 0.9 percent to $1.3247 today.

Volatile Market

“When Ireland accepted help, the general feeling in the market was that this could restore some calm; that hasn’t been the case,” said Michiel de Bruin, who oversees about $35 billion as head of European government debt at F&C Netherlands in Amsterdam. “Authorities should be doing their utmost to calm the situation.”

Analysts at Morgan Stanley said in a Nov. 11 report that any move by Ireland to use the European Financial Stability Facility would boost the euro and be a “circuit breaker” for the European sovereign debt crisis. While Ireland has enough money to pay its debts until the middle of next year, it has requested a bailout from the European Union and International Monetary Fund amid concern the cost of rescuing its banks would overwhelm government finances.

Portuguese Finance Minister Fernando Teixeira dos Santos said in an interview published today that EU governments can’t impose a bailout on his country.

A majority of euro region officials and the European Central Bank are putting pressure on Portugal to accept aid that helps stop contagion spreading to Spain, the Financial Times Deutschland reported today. German government spokesman Steffen Seibert said the nation isn’t pushing Portugal to seek aid. An official at the office of Portuguese Prime Minister Jose Socrates also denied the report.

Greek Kickoff

The most recent leg of the debt crisis that started a year ago in Greece kicked off after EU leaders agreed Oct. 29 to consider German Chancellor Angela Merkel’s demand for a crisis-resolution mechanism that forces bondholders to share the cost of future bailouts.

The average yield of 10-year bonds from Greece, Ireland, Portugal, Spain and Italy rose to 7.49 percent today from 5.93 percent a month ago. The Stoxx 600 Banks Index of European shares fell almost 7.8 percent in the past month.

Adding to the pressure is the ECB’s push to scale back liquidity support for banks.

“This tough stance is reigniting a euro debt crisis,” Greg Gibbs, a Sydney-based currency strategist at Royal Bank of Scotland Group Plc, wrote in a research report dated Nov. 23. “The recent problems in Europe may relate to fears that weak banks in the periphery will lose access to cheap funding from the ECB, and their deteriorating position will in turn put more pressure on the sovereigns.”

European Fund

Greece agreed to a 110 billion-euro ($145 billion) rescue program in April before the creation of the 750 billion-euro European Financial Stability Facility in May as a backstop for the common currency. Cowen said this week a bailout of 85 billion euros had been discussed for Ireland.

Policy makers must head off a “spreading disaster” in the euro region, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co. “The comforting statements issued by European ministers in recent days must be urgently translated into meaningful actions,” he wrote earlier this week in an article for the Financial Times.

Analysts also say more needs to be done. Portugal should request preemptive steps to stem the widening yield spreads between high-deficit nations’ debt and German bunds, according to WestLB AG.

‘Huge Haircuts’

Bondholders of European banks need to accept “huge haircuts” on their assets, said currency-trading firm FXPro. Germany may pull out of the euro to allow the currency to devalue, wrote Graham Turner, chief economist at GFC Economics, a London-based consulting firm.

“Time is of the essence,” a team of London-based analysts at Nomura International Plc led by Nick Firoozye wrote in a Nov. 24 investor note. “The continued confusing political rhetoric is driving investors out of Europe. Once the euro area issuance cycle gets under way in 2011, unless many of the issues surrounding collective action clauses, crisis resolution mechanisms and their timing have been resolved, policy makers could lose the battle.”

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