Amplify’d from www.ft.com

Trichet hints at bond purchase rethink

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.

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.

But the pace at which the crisis has spread has altered the debate within the ECB, which could justify stepping up its intervention by arguing governments’ borrowing costs were far out of line with fundamentals, signalling dysfunctioning markets.

Speaking in the European parliament on Tuesday, Mr Trichet would not comment “at this stage” on the bond programme “in the light of the current situation”. But the programme was “on-going” and decisions on its future would be taken by the 22-strong governing council, which next meets on Thursday. He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.

Since May, the ECB has spent just €67bn under its bond purchase programme. Financial markets, however, see the ECB increasingly as the only institution with pockets deep enough pockets to ease the crisis.

Mr Trichet said that “pundits are under-estimating the determination of governments”. Eurozone growth was proving surprisingly strong, and Ireland’s bail-out at the weekend had shown the EU was capable of responding to crisis

Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.” Read more at www.ft.com

 

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Belgium faces an important test Monday, when it aims to sell between 1.5 billion euros ($1.9 billion) and 2.5 bn

Amplify’d from www.cnbc.com

Think BIIGS: There's One Euro Country Under the Radar

Belgium faces an important test Monday, when it aims to sell between 1.5 billion euros ($1.9 billion) and 2.5 billion euros worth of bonds in an auction that will indicate the level of investor confidence in the nation plagued by political turmoil and high levels of debt.

The auction of 2014, 2020 and 2035-dated bonds comes as bond vigilantes are increasingly targeting the country of 11 million people amid concerns over its high level of debt and political instability.

Belgium could be caught up in the same web as the peripheral euro zone nations of Portugal, Ireland, Italy, Greece and Spain - the so-called PIIGS - if it does not succeed in forming a government soon to reduce the budget deficit through fiscal austerity and bring down its debt, some analysts say.

Against the backdrop of the euro zone debt crisis, credit default swaps linked to Belgian debt – indicating the cost of insuring Belgian debt against default - rose to a record high this week.

In its latest report on Belgium, rating agency Standard & Poor’s wrote that its AA+ rating on the country’s long-term debt – the second-highest rating at the agency – could come under downward pressure if a continued political stalemate were to diminish the authorities' capacity to address the “outstanding challenges”.

Public debt is just under 100 percent of gross domestic product, the third-highest in the European Union, with only Italy and Greece preceding it, EU data showed.

“There is a political risk, and it is taking very long (to form a government), but there is no chance of default right now,” Vanneste said.

“This is of course a problem," Ledent said. "But the 2010 budget deficit will probably be around 4 percent next year…And contrary to the peripherals we are fully benefiting from German growth.”

Vanneste agreed there was no real risk in the short term, as Belgium would be able to meet 2010 and 2011 commitments to cut its budget deficit.

See more at www.cnbc.com

 

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I should warn those investors who are short selling Spain that they are going to be wrong

Amplify’d from www.ft.com

Spain issues defiant warning to markets

Spain has warned financial traders betting against its debt that they will lose money, in a defiant challenge to the markets which are driving Madrid’s cost of borrowing sharply higher.

José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country even as the premiums demanded by investors to hold Spanish sovereign debt over that of Germany’s rose to euro-era highs.

This week’s sharp rise in Spanish 10-year bond yields to 5.2 per cent is an indication of growing concern in eurozone bond markets that the fiscal crisis in Ireland could spread to other debt-laden countries including Portugal and Spain.

I should warn those investors who are short selling Spain that they are going to be wrong and will go against their own interests,

Portugal rejected as “totally false” reports it was under pressure to accept an international bail-out.

The eurozone’s peripheral bond markets came under further pressure amid increasing worries that the debt crisis was spreading. Irish yields rose 3 basis points to 9.071 per cent and Portuguese yields rose 3 basis points to 7.038 per cent.

The euro tumbled further in morning trading, to below $1.32 against the dollar, 3.5 per cent lower on the week and a fresh nine-week low.

On Thursday, 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 Citigroup, 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.

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.

Media reports said the German government had been approached by the European Commission to double the size of the rescue fund, to ensure funds were available in the event of Spain and Portugal seeking assistance. Read more at www.ft.com

 

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Amplify’d from uk.reuters.com

EU denies pushing Portugal towards bailout

European officials denied "absolutely false" reports Portugal was under pressure to seek a bailout and Spain ruled out on Friday needing help to manage its finances, despite fears of a spreading euro debt crisis.

The Financial Times Deutschland quoted unidentified sources as saying some euro zone states wanted Portugal to seek aid in order to avoid Spain, the fifth largest EU economy, from having to follow suit.

If Portugal were to use the fund, it would be good for Spain, because the country is heavily exposed to Portugal," the paper quoted a source in Germany's finance ministry as saying.

EU Commission President Jose Manuel Barroso dismissed the FT report, echoing a vehement denial by Portugal.

I can tell you that it's absolutely false, completely false," Barroso said, adding that an aid plan for Portugal had neither been requested nor suggested.

German government spokesman said Berlin was not pressuring anyone to request financial help and said it expected Portugal's austerity measures -- due to be passed later on Friday -- to work

The rapid public denials of the FT report suggested some alarm among euro area leaders at the prospect of the debt crisis engulfing ever more of its members.

The cost of borrowing rose again on Friday for Ireland, Portugal and Spain as markets demanded a premium for holding their debt.

Spain has already passed its own austerity budget and Spanish Prime Minister Jose Luis Rodriguez Zapatero "absolutely" ruled out that Madrid would have to follow Ireland and Greece and seek financial assistance

Those who are taking short positions against Spain are going to be mistaken," he told RAC1 radio.

A rescue aimed at meeting Spain's financing needs for 2-1/2 years would cost 420 billion euros ($557 billion) according to a Capital Economics estimate, the lion's share of the 440 billion euro European Financial Stability Facility (EFSF) reserve set up by the euro zone after the Greece bailout. Read more at uk.reuters.com

 

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Amplify’d from www.ft.com

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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From Henri Coanda to Avram Iancu and then back to Decebal

Amplify’d from www.economist.com

From Nikola to Alexander

Less than a month before Kosovo's general election, the government has decided to rename the airport Adem Jashari, after the Kosovo Albanian fighter hero, whose death, in March 1998, along with that of dozens of his extended family at the hands of Serbian security forces, was one of the triggers for the uprising against Serbian rule

The government's proposal is the rough equivalent of northern Kosovo's Serbs renaming their airport "Slobodan Milosevic", their wartime leader, who ethnically cleansed the Kosovo Albanians. (This is probably exactly what they would do, if only they had an airport.)

Sarajevo airport is particularly important to Bosniaks; during the war the city only survived the siege thanks to humanitarian supplies flown in there by the UN, and by arms which were delivered through a tunnel that the Bosnians dug under the runway connecting the city with territory they held on the other side of it.

Less than half an hour’s flight away, Belgrade airport (pictured) was renamed Nikola Tesla in 2006. A rather less divisive figure, Tesla was a Serb-turned-American whose work was crucial in the discovery and development of commercial electricity. He was born in 1856 in what is now Croatia; happily, both Serbs and Croats can agree that he is a figure worth celebrating.

Annoyingly, flights between Zagreb and Belgrade never resumed after the war. There are only 230 miles between the cities; not enough, perhaps, to make commercial flights viable. You can, however, fly from Belgrade to Ljubljana, the Slovene capital, whose airport was renamed Joze Pucnik in 2007, after a famous dissident widely regarded as one of the fathers of Slovene independence.

Down south the Albanians have renamed Rinas, or Tirana airport, after Mother Teresa of Calcutta. Although she was an ethnic Albanian she actually came from neighbouring Macedonia, having been born in 1910 in Skopje.

Most controversial of all has been the renaming of Skopje airport after Alexander the Great, in 2007.

friends of Macedonia thought this must be some sort of one-off joke designed to gain a rise out of the Greeks, who believe that the Macedonians are trying to expropriate symbols of Hellenism. It was not. The Macedonians proceeded to rename a motorway that runs towards Greece after Alexander too.

I know there have been no moves to rename the airport, which is sometimes known as Golubovci after its location.

Podgorica was actually the first of all the region’s airports to change its name, by virtue of the fact that in 1992 the city itself reverted to its original name after being known in communist times as Titograd. Read more at www.economist.com

 

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The Cost of Strategic Patience

Amplify’d from www.economist.com

Ignore us at your peril

A 65-minute-long artillery barrage on November 23rd rained down upon the tiny South Korean island of Yeonpyeong, marking the first time since the war of 1950-53 that the North has fired shells at civilian targets on land.

Four South Koreans—two civilians and two marines—were killed in the onslaught that left houses and hillsides in flames, and about 20 injured.

The barrage came only days after North Korea revealed a new uranium-enrichment facility to American scientists. Its operators told the visitors that its purpose was to generate nuclear fuel—but no one missed the message that its output could just as well be used to make warheads.

The first is that the regime is reverting to familiar gangland tactics to bully its way back to international negotiations under the framework of the stalled six-party talks, chaired by China and including America, Japan and Russia. South Korea and its main allies, America and Japan, have since last year engaged in a process that Barack Obama’s administration calls “strategic patience”: offering to renew talks only when the North makes a meaningful commitment to scrap its nuclear arsenal.

Victor Cha of the Centre for Strategic and International Studies, and a Bush administration negotiator with North Korea, says the regime has been trying hard to prove its mettle as it enters an unstable era of new leadership.

America’s state department insists it will not “buy into this reaction-reward cycle that North Korea seeks to perpetuate”.

This leaves China alone in a position to break the stalemate, by applying quiet pressure on its unruly ally. But China’s public reaction, as after the Cheonan’s sinking, was to urge calm and to condemn no one. And when China is a milquetoast, it only emboldens the Kim family—making life worse for everyone else. Read more at www.economist.com

 

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