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Euro May Drop More Before Debt Accord, Komileva Says: Tom Keene

Divergent interests between Germany, the European Central Bank and private investors are delaying a solution to the euro region’s debt crisis, according to Brown Brothers Harriman & Co.’s Lena Komileva.

“It looks like the euro will have to get weaker and peripheral bond spreads will have to spike higher before politicians are forced to agree on a new deal for Greece,” Komileva, head of Group of 10 strategy at Brown Brothers in London, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It just seems like there is too much indecision with European policy makers repeatedly missing their self-imposed deadlines to take decisive, fundamental action on Greece.”

The 17-nation currency weakened 0.6 percent to $1.4061 against the dollar as Italian and Spanish bond yields surged to euro-era records before a summit of leaders this week on the region’s financial stability. The euro dropped on July 12 to $1.3837, the lowest level since March.

Germany said it’s confident that European leaders will reach agreement on funding a second Greek bailout at the July 21 summit, as investors sell Spanish and Italian bonds on concern that the crisis is spreading.

“We must master this challenge,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, said in Berlin today. “The way the chancellor sees it, the specific meeting this Thursday is about agreeing precisely on the main points of a new program for Greece, with all relevant details.”

Record Yields

Italian 10-year bond yields rose as much as 27 basis points, or 0.27 percentage point, to 6.027 percent today, the highest level since 1997 and surpassing last week’s 6.016 percent peak. Spanish 10-year yields increased as much as 30 basis points to 6.368 percent, also the highest since 1997. In London, credit-default swaps on Germany jumped five basis points, or 0.05 percentage point, to 65, the highest since March 2009, CMA prices showed.

“For Germany, guaranteeing all government costs at a time when the crisis is spreading particularly to Spain and Italy will raise Germany’s borrowing costs down the line while removing incentives for indebted governments to get themselves in order,” Komileva said. “For the ECB, the risk of insuring Greek assets in the scenario of selective default will turn the central bank into a bad bank which will undermine the euro, politicize the ECB’s activities and undermine its independence.”

ECB President Jean-Claude Trichet told the Financial Times Deutschland in an interview that the central bank will not accept bonds from a nation that defaults as collateral. Trichet has repeatedly said the central bank has done its part and the burden of a solution should fall on governments.

“For the markets, they actually do want to see Greece’s credit position improve, but they’re also arguing that we do need to see some form of debt write-off that reduces Greece’s debt burden to a more manageable level,” Komileva said.

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