Reuters blog archive
Corporate bonds normally yield more than sovereign debt since companies are seen as more likely than states to go bust. But during the euro zone debt crisis, when various governments had to be bailed out, that relationship broke down in Spain and Italy.
Madrid and Rome are paying more to borrow in the market than similarly-rated companies generally. Ten-year Spanish and Italian sovereign bonds offer a comfortable premium of more than 60 basis points over a basket of BBB-rated corporate debt, even though that gap has more than halved from this year’s highs.
Spain and Italy are also paying more to borrow in the market than BBB-rated companies in their own countries. Calculations by Fathom Consulting using Thomson Reuters data show the average yield for 10-year Italian corporate debt within the euro zone basket is 2.4 percent versus 4.06 percent in the equivalent sovereign. For Spain, the average BBB corporate yield is 2.00 percent – also below a sovereign yield of 4.03 percent.
This shows that even though the risk of a break-up in the euro zone has all but vanished, the market, historically, is still in anomalous territory. Spanish and Italian sovereign yields overtook their equivalent on the basket of corporate debt in 2010 when the euro zone debt crisis took hold.
The full Ecofin of 28 EU finance ministers meets after Monday’s Eurogroup meeting of euro zone representatives didn’t seem to get far in unpicking the Gordian Knot that is banking union. Ireland’s Michael Noonan talked of “wide differences”.
The ministers are seeking to create an agency to close euro zone banks and a fund to pay for the clean-up - completing a new system to police banks and prevent a repeat of the bloc’s debt crisis.
The finance ministers of Germany, France, Italy and possibly Spain are expected to meet in Berlin to discuss banking union. Two sources told us Dutch Finance Minister Jeroen Dijsselbloem – who chairs the Eurogroup of euro zone finance ministers -- should attend as will EU commissioner Michel Barnier and key European Central Bank policymaker Joerg Asmussen.
There is a possibility, however, that a violent storm that has hit Germany could prevent the participants reaching Berlin. If they make it, they will bid to come closer to a solution on a planned European resolution mechanism to deal with troubled banks ahead of a full meeting of euro zone finance ministers next week to help fashion a deal by the end of the year.
The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.
The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.
Ukraine continues to top the European worry list.
Monday demonstrated how quickly the financial side of the equation can spiral out of control. The hryvnia currency slumped and the cost of insuring against Ukrainian default soared, forcing the central bank to intervene and urge its citizens not to spark a bank run.
Having turned its back on the EU, Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Presumably Russia will have to help out if it is not to have a basket case on its doorstep.
Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.
To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.
Today’s meeting of EU finance ministers will grapple with banking union and next year’s stress tests though with no German government in place, a leap forward is unlikely.
One German official seemed pretty clear yesterday, saying: “We don't want a mutualisation of bank risks.” That, some would argue, takes the union out of banking union and is certainly a very different approach to the one promised last year when EU leaders were scrambling to keep the euro zone together.
It’s euro zone third quarter GDP day and Germany and France are already out of the traps with the latter’s economy contracting by 0.1 percent, snuffing out a 0.5 percent rebound in the second quarter. Growth of 0.1 percent was forecast, not just by bank economists but by the Bank of France too.
Germany failed to match its strong 0.7 percent growth in the second quarter, but expanding by 0.3 percent – in line with forecasts - it is clearly in much better shape.
The Bank of France's monthly report forecasts growth of 0.4 percent in the last three months of the year, up from an anaemic 0.1 percent in the third quarter. That still makes for a fairly doleful 2013 as a whole.
France is zooming up the euro zone’s worry list, largely because of its timid approach to labour and pension reforms. Spain has been much more aggressive and is seeing the benefits in terms of rising exports (and, admittedly, sky-high unemployment). So too has Portugal.
from Nicholas Wapshott:
There have been a lot of sighs of relief in Europe lately, where countries like Britain and Spain, long in recession, have finally started to grow. Not by much, nor for long. But such is the political imperative to suggest that all the misery of fiscally tight economic policies was worth the pain that there are tentative claims the worst is now over and, ipso facto, austerity worked.
Hold on a minute. Growth is good. Growth is what allows countries to pay down their national debt by increasing economic activity, putting the unemployed to work and making people prosperous enough to pay taxes. But gross domestic product growth alone is not enough to provide adequate sustained prosperity if it does not also lead to significant job growth.