While the headlines surrounding Greece have been relatively bullish, the price of insuring euro zone debt against default has soared back to historic levels.
Traders have seen a material jump in borrowing costs in the debt-plagued countries on the edge of the euro zone. This week, Spain is the focus again.
Spanish banks are suffering today after an extremely critical note from UBS warned that rather than being at the end of the credit crisis, these institutions’ woes are just beginning.
This is another negative for Budapest and the European nations confronting mounting debt issues.
The euro is down 5% so far this month amid ongoing confusion over whether Ireland needs or will accept a roughly $140 billion rescue
In a somewhat poignant twist, the finance minister of sovereign-challenged Portugal is advising his Irish counterparts to surrender their pride and accept an $80 billion bailout.
We are seeing emerging markets pull back, not a huge surprise with the US dollar strength and a bit of a hangover from the last week.
The cost of insuring sovereign debt along the edges of the euro zone is increasing again due to a number of political factors
Athens auctioned off around $1.6 billion in three-month bills this morning, proving that the sovereign credit fears of the spring have been almost entirely allayed.
Demand for the offering was heavily oversubscribed — 5.19 times as many bids as the Greek government had debt to sell — and the yield finally priced at 3.75%.
When you consider that the offering was originally set to raise only $1.2 billion but was expanded by 30% once the bids started coming in, the news is fairly spectacular for the Greeks and for the euro zone.
The interesting thing is that more than 50% of the bonds went to foreign investors. This may mean U.S. traders and other people coming in from ultra-low-rate markets looking for a better return on their money.
After all, 3.75% is a lot more impressive than the 0.14% that 3-month Treasury bills currently pay — assuming you can live with the risk that Greece may somehow default on its credit obligations between now and January.
Since that risk seems relatively low, taking the Greek securities is probably a good trade.
Either way, good news for the euro and EU (quote):
More people should be talking about the fact that the credit risks in countries like Ireland and Portugal have gone back up to record levels. Talk about canaries in the macro coal mine!
The spread between what it costs to insure debt on the euro periphery — Ireland and Portugal in particular — and the cost of insuring comparable bonds in the core (Germany) has crept back up in the last few weeks.
Despite assurances to the contrary from people like Goldman Sachs, the markets are still worried about the prospect that one of these countries will eventually default on its debt.
At this point, both Portuguese and Irish bonds are trading at a record discount compared to German debt, which has rallied as euro traders hope to contain their risk exposure.
Spanish yield spreads are also rising to two-month highs, but are still slightly better than the levels they suffered at the peak of the euro crisis. Traders widely expect at least one more credit rating downgrade for Spain in the next week or so.
Irish banks, especially AIB (quote), have been back under pressure as a result of this. Not a good time to buy these stocks. There will likely be more bad news — and not much good news — to come.