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Eurozone borrowing costs hit record

The cost of borrowing for the eurozone’s peripheral economies rose to record highs on Thursday amid signs the debt crisis that forced Ireland into a multibillion-euro bail-out was spreading.

Irish, Portuguese and Spanish bond yields surged to their highest points since the launch of the euro, as traders said even some of the bigger eurozone countries could soon be affected. Matt King, global head of credit strategy at Citi, said the danger was the selling could develop a momentum of its own.

“The moment you have even a flicker of a doubt about default risk, it becomes rational to reduce positions in a larger country like Spain purely on grounds of diversification,” he said.

“Wildfire can be very difficult to put out. The contagion could eventually spread all the way to France. The markets are very nervous.”

You can’t do trades in any size in the stressed peripherals like Ireland or Spain, so people are looking for what else might work.”

Irish 10-year bond yields rose above 9 per cent, Portuguese yields jumped further above 7 per cent – a level Lisbon says is not sustainable – while Spanish yields rose further above 5 per cent. The euro dipped towards two-month lows, falling for the fourth day in a row.

The renewed volatility came as Germany rejected any suggestion of an increase in the size of the €440bn ($588bn) European financial stability facility – the eurozone rescue fund established by European Union finance ministers in May to help debt-laden members of the common currency zone.

Elsewhere, EU officials said they wanted to include liquidity ratios in a fresh round of bank stress tests, which could get under way as early as the first quarter of next year.

The move follows criticism of the last stress test exercise, conducted by the Committee of European Banking Supervisors, which focused heavily on capital ratios. When the results were published in July, 84 of the 91 European banks scrutinised had passed.

That, however, failed to insulate Ireland’s two biggest lenders from a commercial funding squeeze which, in turn, was the catalyst for the current Irish crisis.

LCH.Clearnet is used by banks and financial institutions in so-called repurchase transactions, where bonds are exchanged for cash. It shares the burden in a potential bond default and allows banks to reduce their counterparty risk.

The Irish markets were also undermined by LCH.Clearnet, one of Europe’s biggest clearing houses, again increasing charges for trading Irish bonds because of the jump in the country’s cost of borrowing. It is the third increase in as many weeks. Read more at www.ft.com

 

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