Wednesday, January 14, 2009

Gap from German to other European bond yields widening to record levels

By David Oakley at the Financial Times:

The gap between German and other European bond yields widened to record levels on Tuesday as Portugal became the fourth eurozone country in four days to face the threat of a rating downgrade because of worsening public finances.

The warning to Portugal from Standard & Poor’s sent yield spreads between Germany and almost all eurozone countries on benchmark 10-year bonds to levels not seen since the launch of the single currency in January 1999.

Portugal’s credit rating was under threat because of its high debt burden, the agency said. Spain was given a similar warning on Monday. Greece and Ireland were put on alert on Friday.

Although S&P on Tuesday said the ratings of the US, Japan, Germany, the UK, France and Italy would not change, fears continued to rise over the public finances of weaker eurozone economies and the amount of debt many are taking on to pay for fiscal stimulus packages and bank bail-outs.

Worries over Portugal, Spain, Greece and Ireland are even raising concerns over the future of the European monetary union. It is possible, though still considered highly unlikely, that one economy could leave the single currency.

Thomas Mayer, chief European economist at Deutsche Bank, said: “The fact there are warnings about four economies suggests there could be a big problem. It is not just one country. This is reviving fears of an eventual break-up of monetary union as restructuring the weaker economies could prove very difficult.”

Padhraic Garvey, head of global rates strategy at ING Financial Markets, said: “The markets are telling us that they are very worried over the weaker economies in the eurozone. The worries are offsetting any good news on ratings.”

The gap in yields between German 10-year bonds and most other eurozone economies has jumped fourfold since last summer.

On Tuesday the spread between German and eight other countries’ bonds set records: with Greek bonds it ballooned to 243 basis points (compared with 50bp on June 1 last year); with Ireland to 174bp; Portugal to 109bp; Spain to more than 100bp; Belgium to 93bp; Finland to 77bp; the Netherlands to 70bp; and France to 58bp. Italian spreads rose to 140bp over Germany, but were fractionally higher at the beginning of December.

Eurozone governments are expected to raise more than €1,000bn in bonds this year – nearly double that of 2008.

This vast supply has created difficulties for countries when raising money. A German bond auction failed last week.

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