Euro Zone Contagion Remains In Force
By Win Thin
Even though Greece, Portugal, and Ireland bonds are trading firm today, don’t be fooled into thinking markets are getting more constructive. ECB has reportedly been actively buying today, and so bond spreads are not giving a clean read on market sentiment. Instead, look at CDS prices, all of which are significantly higher today for the periphery. Greece 5-year CDS trading at 1067 bp vs. 1056 bp Friday, Portugal at 550 bp vs. 533 bp, Spain at 358 bp vs. 352 bp Friday, Italy at 258 bp vs. 247 bp Friday, and Ireland at 656 bp vs. 622 bp Friday. These are all at or near record highs despite the Greek and Irish bailouts, despite the creation of the EFSF, despite on-going ECB bond purchases. In the core euro zone, Belgium continues to be hit hardest, with 5-year CDS at 253 bp vs. 246 bp Friday which is also a record high. France is holding fairly steady at 103 bp, but near record highs and we continue to think it’s only a matter of time before it too succumbs to the contagion given what we see as shaky fundamentals.
With regards to ECB bond purchases, it appears that the amount bought fell last week to only EUR113 mln and is the lowest since the end of October. The first two weeks after the last ECB meeting saw increased bond purchases, but those have since tailed off in recent weeks. Indeed, the bulk of the ECB purchases were seen over the summer.
As we noted in the daily, there are press reports that German resistance is weakening to an increase in the EFSF. We would put this in the category of “Too Little Too Late.” European policy-makers continue to react to events, dragged kicking and screaming into doing the right thing months after the fact. They have yet to take what can be termed as proactive measures, and that is why the contagion remains in force. Portugal is squarely in the market spotlight and rightly so (SpecialFX on Portugal to be sent out shortly), and the textbook contagion seen so far suggests that an eventual EFSF program for that country is unlikely to provide anything more than short-term relief for the periphery. Markets will simply turn their focus on Spain, Italy, Belgium, and France.