Second Leg Of European Debt Concerns
Extension of European debt problems returned as a mayor concern this week. Most notable problem is, off-course, much hyped Ireland’s banking system nationalization. Latest leg included spiting up Anglo Irish. Bloomberg: Ireland’s Burial Plan for Anglo Irish Keeps Cost Question Alive. Irish 10 year government yield spread versus same maturity German issue moved to new highs.
Chart 1. Ireland vs. Germany 10 Year Government Bond Yield Spread
Source: Bloomberg
Moving out of the Euro zone, Hungary (prime candidate for a default and subsequent debt restructuring) spread also moved close to the highest recently reached levels. Hungary’s politicians in short time span have turned from wolves (Bloomberg: Hungary Shows IMF Austerity `Dangerous’ for European Recovery, CEPR Says) to sheep (Bloomberg: Hungary’s Surrender on Budget Deficit May Boost Forint, Bonds). Swiss franc/Hungarian forint exchange rate moved to new highs in recent couple of days and it is up 45% since the end of 2007. Swiss Franc denominated loans are crushing Hungarian economy by both reducing disposable income and increasing non-performing loans thus putting putting pressure on Hungary’s banking system. With Hungarian government and foreign debt levels (90%; 106%) Hungary probably doesn’t stand a chance.
Chart 2. Hungary vs. Germany 10 Year Government Bond Yield Spread
Source: Bloomberg
Chart 3. Swiss Franc – Hungarian Forint Exchange Rate
Source: Bloomberg
Greece and Portugal spreads also rose to (near) record highs.
Chart 4. Portugal vs. Germany 10 Year Government Bond Yield Spread
Source: Bloomberg
Chart 5. Greece vs. Germany 10 Year Government Bond Yield Spread
Source: Bloomberg
Italy and Spain spreads remained out of focus (this time) and have not risen (much) in last few weeks.