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“Her proposal helped worsen a selloff in the bonds of the bloc’s so-called peripheral nations. The extra yield that investors demand to hold Irish debt over German bunds rose to a record and the spreads on Greek and Portuguese debt widened.’’ :tv:
Merkel's Bond-Pain Plan Provokes Selloff Foreseen by Trichet: Euro Credit
By Paul Dobson - Nov 2, 2010 5:01 PM PT
German Chancellor Angela Merkel is once again provoking a selloff in the bonds of the region’s most indebted nations.
After stalling European Union efforts to rescue Greece in the first four months of this year, Merkel yesterday stepped up her push to make bondholders pay toward any future bailout of a euro nation. Her proposal helped worsen a selloff in the bonds of the bloc’s so-called peripheral nations. The extra yield that investors demand to hold Irish debt over German bunds rose to a record and the spreads on Greek and Portuguese debt widened.
“Merkel wants to reassure voters Germany won’t underwrite the obligations of the rest of Europe,” said Tom Sartain, a fund manager at London-based Schroders Plc, which has $245 billion under management and doesn’t own Greek, Irish or Portuguese debt. “Talk of burden sharing is the opposite of what bond holders want to hear. The price action vindicates our decision not to hold these bonds.”
Traders have dumped Irish and Portuguese bonds since EU leaders on Oct. 29 endorsed Merkel’s push for a permanent debt- crisis mechanism, renewing speculation that those countries may follow Greece in seeking a bailout as they struggle to cut budget deficits.
The premium on Irish 10-year bonds over bunds rose 22 basis points to 484 basis points yesterday. Portugal’s spread widened 13 basis points to 375 basis points and the Greek spread reached 833 basis points, the most in more than a month.
Trichet Warning
Merkel’s push caused apprehension among some officials even before this week’s selloff.
European Central Bank President Jean-Claude Trichet told EU leaders he’s concerned that talk of a debt restructuring mechanism would hurt the bonds of peripheral euro nations, according to an EU official familiar with the talks.
“I’m not surprised” that the proposal has “moved Greek and Irish spreads,” said Toby Nangle, director of asset allocation at London-based Baring Asset Management, who helps oversee about $46 billion for clients and owned six-month Greek debt until last month. “These are movements toward private- sector burden-sharing and markets tend not to like that.”
EU leaders have yet to agree on the shape of any new mechanism, which would replace the 750 billion-euro ($1.1 trillion) fund set up in May after it expires in 2013. EU leaders set a December deadline for the European Commission to sketch out how it might work, how to treat private bondholders and whether to involve the International Monetary Fund. Spain has already said that provisions to reschedule or cancel some debts would expose its bond to selling pressure.
Debt Reality
“The more you talk about restructuring debt, the harder it is to obtain debt,” Irish Finance Minister Brian Lenihan said in an interview with Dublin-based RTE television yesterday. “That is the reality.”
Merkel’s stance echoes her approach to Greece earlier this year when she initially refused to rush to its aid, sparking speculation about the euro region’s ability to handle the worst crisis in its history. While billionaire George Soros at the time said her strategy risked pushing Greece into a “death circle,” Merkel said the “tough” terms of the country’s eventual bailout vindicated her policy.
The new push comes as her Christian Democrat party loses support to the Social Democrats, with an Oct. 27 Forsa poll putting the opposition 12 percentage points ahead of her CDU- Free Democrat government. The government also faces regional elections from March that involve 25 percent of the population.
Time Bomb?
Leaving taxpayers to shoulder the burden of bailouts may set off “a dangerous social time bomb” of popular dissatisfaction, Finance Minister Wolfgang Schaeuble said in a speech late yesterday. “The currency union was never designed as a model for the enrichment of financial speculators.”
Merkel’s government was the biggest contributor to April’s Greek bailout and would also shoulder the lion’s share of any rescue under the current temporary backstop.
“These things are more about politics than economics,” said Paul Lambert, head of the global macro team at Polar Capital Holdings Plc in London. “It’s clear that for some economies in Europe it’s going to be incredibly difficult to make the fiscal adjustments needed on their own. It’s either going to mean Germany picking up the tab, or countries in Europe being cut loose.”
The German proposals are hurting Portuguese debt even after the nation’s government and biggest opposition party reached an agreement Oct. 29 on next year’s budget. The country’s bonds are the third-worst performing government debt securities this year, down 5.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Irish Spread
Only Greece, with a 16 percent decline, and Ireland, with a 6.9 percent drop, fared worse. German bonds earned more than 8.2 percent this year.
The spread on Irish bonds has doubled in the past three months as the government tries to cut its deficit in the face of bank-bailout costs that may reach 50 billion euros. The country’s 10-year bond yesterday yielded 7.304 percent, the most since 1996.
“The German government is following what the market is telling it,” said Nicola Marinelli, a portfolio manager at Glendevon King Ltd. in London, which oversees $200 million in assts. “The Greek government, and probably the Irish and Portuguese, will need to be bailed out. If you sense that it’s inevitable then it’s better to have something to manage that than complete chaos.”
