Nomura’s Richard Koo is kinda with Christine Lagarde when it comes to the Greek tax problem.
But eurozone bonds (aka eurobonds) are not the solution, he says. Firstly, Greece needs to address its mutual distrust problem with Germany, and persuade the Germans that it will get serious about this tax collection thing: Read more
Spain saw pretty good demand at its Tuesday morning auction of short-term debt, but its borrowing costs nearly doubled.
From Reuters with our emphasis: Read more
Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A rated France, Austria, Finland and the Netherlands, reports the FT. The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.
Here’s a tip for all financial journalists and market participants.
To spot the next source of financial instability — simply identify the assets currently considered ‘safest.’ At the moment we’d argue those are covered bonds, and of course, sovereigns. The first hasn’t gotten much regulatory scrutiny of late but the second, well, there are some capital games afoot. Read more
The European Central Bank suspended its emergency purchases of eurozone government bonds last week as the debt crisis eased, allowing it to focus on combating rising inflation, reports the FT. Official data published on Monday showed annualised eurozone inflation reached 2.4 per cent in January, the highest for more than two years and beyond the ECB’s target of “below but close” to 2 per cent. The ECB is expected to hold its interest rate unchanged at 1 per cent on Thursday. However, the larger than expected rise in prices is likely to prompt warnings from Jean-Claude Trichet, bank president, that the ECB will act on any signs of inflation spinning out of control. Eurozone inflation was 2.2 per cent in December.
Beyond the spotlight glaring on China’s leader Hu Jintao as he kicks off his US visit are some intriguing movements in Beijing’s foreign reserves management.
First, we had China’s pledge to buy eurozone bonds amid its recent charm offensive in Europe. Read more
Japan has pledged to buy more than 20 per cent of the eurozone’s first ever bond issue, raising expectations that other international investors will support the pioneering fund-raising move and help ease the region’s debt crisis, reports the FT. The European financial stability facility, the €440bn ($570bn) eurozone bail-out fund, is marketing its first bond issue of up to €5bn among investors in Europe, the US and Asia. Bankers close to the deal are confident of attracting support from sovereign wealth funds in China, Norway and the Middle East. Funds raised from the issue, to be priced next week, will be used to back the €85bn bail-out of Ireland. Some investors see the bond issue as a precursor to a common eurozone bond market that could rapidly expand.
Germany’s opposition Social Democrats have challenged Angela Merkel, German chancellor, over the eurozone debt crisis, calling for the “limited introduction” of common eurozone bonds to help bolster the solidity of the economic and monetary union, reports the FT. At the same time, they proposed an “intelligent haircut” for bondholders by restructuring the debt of Greece, Ireland and Portugal, while giving debt guarantees for “stable” members of the eurozone to prevent further contagion. In an article in Wednesday’s FT, Frank-Walter Steinmeier, Germany’s former foreign minister and leader of the SPD in the lower house, and Peer Steinbrück, former finance minister, urge Germany to take the lead in pressing for closer integration to support the euro.
Jean-Claude Trichet, European Central Bank president, has left open the possibility of the bank significantly expanding its government bond purchases and warned markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis, reports the FT. The hint that the ECB could recalibrate its response to the unfolding crisis came as the premiums that Italy and Spain pay over Germany benchmark interest rates hit fresh highs since the launch of the euro. The euro’s monetary guardian had already stepped up purchases of Portuguese bonds, traders reported. The ECB’s bond purchase programme has been controversial within its governing council since its launch in May, with Axel Weber, president of Germany’s Bundesbank, voicing his opposition publicly. The FT adds that Spanish, Irish and Portuguese companies are being increasingly priced out of bond markets as contagion spreads away from sovereigns.
Foreign investors have cut their holdings of so-called peripheral eurozone government bonds amid growing fears over the health of these economies, the FT reports. Local banks and financial institutions replaced foreign counterparts as holders of Greek, Irish, Portuguese and Spanish debt in the second quarter, at the height of the sovereign debt crisis amid fears of a default. The trend, identified in research by Citigroup based on World Bank and Eurostat data, has continued since the second quarter with government bond auctions attracting almost exclusively local buyers.