Thu Mar 24, 2011 6:11am EDT
* Irish margin hike, Spain bank downgrade add to periphery woes * Wider contagion limited for now; Spain, Italy hold up
By Kirsten Donovan
LONDON, March 24 (Reuters) - Portugal's government bond yields hit new highs on Thursday after parliament rejected new austerity measures and the prime minister resigned, increasing expectations that Lisbon will need a bailout sooner rather than later. Heaping more misery on the euro zone's periphery, Moody's cut the ratings of 30 Spanish Banks and clearing house LCH.Clearnet raised the margin it charges on Irish government bonds.
All this comes before a European Union summit on Thursday and Friday that had been expected to draw a line under the region's woes but now looks increasingly unlikely to make major progress.
Portuguese PM Jose Socrates quit after Parliament rejected his government's latest austerity measures, adding to uncertainty with the country already widely expected to need financial assistance.
"The wild card here is the European Central Bank. If they don't get involved then you want to be short Portuguese bonds, but if they do start buying bonds in the current thin market then you're going to get hurt very quickly if you're short," said Nomura rate strategist Sean Maloney.
Portuguese borrowing costs -- with 10-year yields now above 7.9 percent and 5-year yields at 8.5 percent -- are seen as unsustainable, but the country faces 4.8 billion euros of bond repayments in April followed by 6.95 billion euros in June, according to Reuters data.
Rabobank strategist Richard McGuire calculates that Lisbon must still raise a further 1.45 billion euros to meet the first redemptions and almost 10 billion euros to fund itself through to the end of June.
An EU source said on Thursday that Portugal was unlikely to ask for a financial bailout package during the summit although it could not be ruled out.
RBS analysts said accessing emergency funding would see Portugal's ratings cut to the triple-B level, while bond yields would likely converge to Irish levels.
"Countries at the begging bowl of the IMF/EFSF over many years cannot be assumed to remain compliant (with requirements), and so the default risk assessment will remain surprisingly high for a surprisingly long time."
The uncertainty gave German Bunds an early bid with June futures FGBLc1 at one point up as much as 44 ticks at 122.74 but emerging buyers of Spanish and Italian paper -- suggesting a wider peripheral blowout was unlikely -- calmed the safe-haven bid leaving Bund futures flat on the day around 122.30.
"People were bearish at the open on the Portugal story but the reality is that that's been touted for the last few days and the fact they need a bailout isn't new, so maybe some people look to take profit on the initial knee-jerk reaction," a trader said.
Two-year German bond yields DE2YT=TWEB were 3 basis points lower at 1.668 percent, with 10-year yields DE10YT=TWEB down half a basis point at 3.23 percent.
Irish bonds also remained under pressure ahead of an EU summit which is unlikely to renegotiate the terms of the country's international bailout.
But Spanish and Italian paper held up well on Wednesday and outperformed other peripherals on Thursday, suggesting wider contagion remains limited for now.
The Credit default swap curves show how investors are currently pricing in different scenarios for Spain and Portugal, with the Spanish curve retaining a "normal" shape but the Portuguese curve peaking around the 3-year mark.
Commerzbank strategist Marcel Bross said the crucial issue for Spain, Italy and Belgium now is whether the EU will take decisions that will keep the risks in Greece, Ireland and Portugal from spilling over.
"We feel that the spread tightening leg in large peripherals is still intact and expect the de-coupling trend of Greece, Ireland and Portugal from large peripherals to continue."
However, EU leaders also look set to disappoint investors by delaying any approval of a beefed-up euro zone rescue fund till June. (sourced :Reuters)
Tags : German Bunds, debt crisis, RBS analysts, triple-B, EU summit, Rabobank
Portuguese PM Jose Socrates quit after Parliament rejected his government's latest austerity measures, adding to uncertainty with the country already widely expected to need financial assistance.
"The wild card here is the European Central Bank. If they don't get involved then you want to be short Portuguese bonds, but if they do start buying bonds in the current thin market then you're going to get hurt very quickly if you're short," said Nomura rate strategist Sean Maloney.
Portuguese borrowing costs -- with 10-year yields now above 7.9 percent and 5-year yields at 8.5 percent -- are seen as unsustainable, but the country faces 4.8 billion euros of bond repayments in April followed by 6.95 billion euros in June, according to Reuters data.
Rabobank strategist Richard McGuire calculates that Lisbon must still raise a further 1.45 billion euros to meet the first redemptions and almost 10 billion euros to fund itself through to the end of June.
An EU source said on Thursday that Portugal was unlikely to ask for a financial bailout package during the summit although it could not be ruled out.
RBS analysts said accessing emergency funding would see Portugal's ratings cut to the triple-B level, while bond yields would likely converge to Irish levels.
"Countries at the begging bowl of the IMF/EFSF over many years cannot be assumed to remain compliant (with requirements), and so the default risk assessment will remain surprisingly high for a surprisingly long time."
The uncertainty gave German Bunds an early bid with June futures FGBLc1 at one point up as much as 44 ticks at 122.74 but emerging buyers of Spanish and Italian paper -- suggesting a wider peripheral blowout was unlikely -- calmed the safe-haven bid leaving Bund futures flat on the day around 122.30.
"People were bearish at the open on the Portugal story but the reality is that that's been touted for the last few days and the fact they need a bailout isn't new, so maybe some people look to take profit on the initial knee-jerk reaction," a trader said.
Two-year German bond yields DE2YT=TWEB were 3 basis points lower at 1.668 percent, with 10-year yields DE10YT=TWEB down half a basis point at 3.23 percent.
Irish bonds also remained under pressure ahead of an EU summit which is unlikely to renegotiate the terms of the country's international bailout.
But Spanish and Italian paper held up well on Wednesday and outperformed other peripherals on Thursday, suggesting wider contagion remains limited for now.
The Credit default swap curves show how investors are currently pricing in different scenarios for Spain and Portugal, with the Spanish curve retaining a "normal" shape but the Portuguese curve peaking around the 3-year mark.
Commerzbank strategist Marcel Bross said the crucial issue for Spain, Italy and Belgium now is whether the EU will take decisions that will keep the risks in Greece, Ireland and Portugal from spilling over.
"We feel that the spread tightening leg in large peripherals is still intact and expect the de-coupling trend of Greece, Ireland and Portugal from large peripherals to continue."
However, EU leaders also look set to disappoint investors by delaying any approval of a beefed-up euro zone rescue fund till June. (sourced :Reuters)
Tags : German Bunds, debt crisis, RBS analysts, triple-B, EU summit, Rabobank
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