It’s crunch for the euro area. The markets are turning on Greece and Portugal

 

Investors freaked out yesterday demanding highest premiums for Greek bonds and also turned against Spain and Portugal. The Greek 10y bonds reached a record high of 6.92%, 3.56pp over German bunds. The yield on Portuguese bonds increase 10bp to 4.21%. The reaction came after comments that China was not interested in increasing its exposure to sovereign Greek debt, reports the FT. Marco Annunziata of Unicredit was quoted that Chinese purchases of Greek bonds would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme”. Earlier Nouriel Roubini said that Spain is a real threat for the eurozone. Kathimerini warns of a domino effect within the EU.

FTD quotes the ever complacent Jean-Claude Juncker with a Crisis, What Crisis comment.

 

 

John Authers on Greece

John Authers conclude that Greece is now considered as a riskier credit than the average emerging market. The trading spread of 3.6pp over US treasuries is higher than the average emerging market sovereign bond spread of 2.97pp over treasuries. Is it justified? While Greece economic problems are less severe than those of Spain, the markets mistrust Greek data. The deficit is deep seated and pre-dates the crisis. Only true austerity measures can counter it, which may curtail economic growth or stir up social discontent.

 

 

Portugal’s 2010 budget disappointing

Portuguese prime minister Jose Socrates defended his 2010 budget, saying that Portugal was not different from the EU average and that public accounts are in order, reports El Pais. On Tuesday the Portuguese government had to report a higher-than-expected deficit of 9.3% for 2009 but pledged to lower it to 8.3% in 2010. Socrates insisted that public debt was with 77.4% well below EU average of 78% but markets reacted with disappointment.

 

 

Barack Obama alas Nicolas Sarkozy

Barack Obama strikes a populist tone in his State of the Union address when he declared job creation number one target this year, writes the FT. Sounding ever more like Nicholas Sarkozy did a couple of years ago, Obama proposes to invest $30bn through community banks to help small businesses, tax credits to those who hire new workers or raise wages and to eliminate all capital gains taxes on small businesses.

 

Europe and its “too big to fail” banks

A study by Goldman Sachs argues that the limit of the size of banks, as envisaged by the Obama administration, is much harder to implement in Europe, reports Der Standard. European Banks are large relative to the GDP of their headquarter country, because the GDP of some of the European countries is small. Nine European banks have balance sheets that are larger than the GDP of their country. The study argues that while the limit of bank size will be difficult in Europe, there is more support for limits on  proprietary trading.

 

Reinhart and Rogoff on why growth will be low, and debt high

Not a very optimistic outlook by Carmen Reinhart and Ken Rogoff: “Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis.” They also write that markets are only just realising what lies ahead. They will soon wake up to the fiscal tsunami.

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