Italian and Greek 10-year bonds are trading at their widest spread to German Bunds since the launch of euro. The spread on Italian bonds Thursday reached as much as 125 basis points, prompting concerns the moves could bleed further into the euro-system.
Ambrose Evans-Pritchard writes in the Telegraph that it is unclear whether this is a temporary spike caused by a lack of liquidity in the bond markets, or whether it reflects concerns over the state of Italian finances. At 107 per cent of GDP, the country’s debt is the third largest in the world after the US and Japan, and way higher than the EU’s Maastricht target of 60 per cent.
Meanwhile, 10-year Greek bonds widened to 150-160 points Thursday. Greece has one of the highest current account deficit-to-gross domestic product ratios in the euro zone.
Dow Jones quotes a note from Chiara Manenti, strategist at Intesa Sanpaolo, saying some of the deterioration in the BTP credit rating is due to macroeconomic fundamentals, but partly it is also due to the general transfer of risk from the banking sector to the state sector.
Italian daily Il Sole-24 reports the Italian government could approve a decree to support the banking sector today in which the Treasury would underwrite subordinated perpetual bonds or new hybrid instruments of banks as a means of recapitalisation without diluting the banks’ share capital.
The credit default swaps market, meanwhile, is showing comparable stress for the sovereign standing of Italy, Greece and Ireland. The WSJ reports:
the cost of swaps linked to euro-zone countries including Italy and Greece has doubled in the past month. For Ireland, which introduced a €400 billion ($518 billion) bank-guarantee program last month that is twice the size of its gross domestic product, investors’ cost of insuring against debt default has risen eightfold since the start of the year.
In graph form, you can see just how severe the sovereign CDS blowout over Bund CDS is:
Related Links
Investors raise their bets on defaults in EU countries - WSJ
Italian bond weakest since lira as Europe crisis deepens - The Telegraph
Lex: Pigs in muck - FT.com
