Monday, 18 April 2011

Spanish bond default probabilities increase as Greece disintegrates

Last Monday the 10 year Spanish bond interest rate spread to Bunds was 1.78%. This morning its 2.10%, an increase of 32 basis points in one week! That is a huge increase in a very short time by bond market standards of the probability of a Spanish default. Spain is going the same way as Greece, current spread to Bunds 10.68% and Portugal, current spread to Bunds 5.86%. It is a recurring pattern.

Greek problems have been pushed out of the headlines by Libya. There is a strongly opposed land fill site development near Athens where the Greek police have been attacked with petrol bombs to the extent that they have withdrawn from the site. There has also been a refusal to pay tolls for a road improvement programme. Civil unrest and protests against the Greek austerity package has now spread to the smaller towns and countryside. I don't think the Greek government can last. Any hint of German involvement and we will be in a 1941 war situation.

Ireland's bond spreads are now 6.23% to bunds slightly above Portuguese levels. Moody has just cut the rating on long term deposits with the two big Irish banks so all Irish bank debt is classified as junk. Ireland wants to renegotiate their bail out interest rate terms but again they run into the German problem. Dr Frau Merkel wants the Irish to increase their corporation tax rate of 12% to stop companies re-locating their accounting centres to Ireland in a tax regime arbitrage operation. The Paddies don't like being told what to do by the Germans any more than they like Brit rule. Worse for Brit banks is that they hold a lot of Irish debt with £50 bn rumoured as RBS exposure.

Meanwhile the Portuguese saga staggers on paralysed by the coming Portuguese elections. All in all the markets are certain of a imminent Greek default and expect a Portuguese and Irish default within the year if nothing else changes. The most brain dead comment I heard on the BBC this morning was that Eurozone defaults could be managed if the banks were given time to rebuild their balance sheets. The Greek rioters, Portuguese electors and Irish politicians are not in a patient mood so there better be a plan B!

The other good news this morning was from Finland where the true Finn, anti-Euro party won 19% of the vote. Finland is in the Eurozone. Any Portuguese bail out requires unanimous agreement by all its members so if the Finns say No then what happens. The Euro is starting to sink. That's good news for us Kippers.

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