Now that the U.S. Fed‘s quantitative easing decision is out of the way, it seems like the markets have shifted their attention back to the euro zone. Let’s see how the infamous PIGS, or Portugal, Ireland, Greece, and Spain, are faring against the big, bad wolf named sovereign debt, shall we?
Portugal had the spotlight last Wednesday as it held its bond auction for six and ten-year bonds. Many were skeptical if the government could stir up enough demand, but to everyone’s relief, it was able generate 1.242 billion EUR which was near the top of its 750 million EUR to 1.250 billion EUR target range.
However, in order to hit its targets, the government had to shell out record-high yields to attract investors. The government paid 6.156% for 6-year bonds and 6.806% for 10-year bonds! Good thing the yields are still below those in the secondary market where the difference between yields of 10-year bonds and similar German bunds have surged to over 7%!
Another sore spot of the euro zone is Ireland which has been nursing a whopping 14.4 billion EUR budget deficit as of October, up from September’s 13.4 billion EUR figure. Hah! Even an army of gold-producing leprechauns are gonna shake their heads in dismay over that!
Doubts on the country’s ability to pay its dues have been pushing Irish bond yields to record highs for the past couple of days. 10-year Irish bond yields soared above 8.7%, and its spread with the “relatively safe” German bunds widened to as much as 6.19%!
Of course, it also doesn’t help that Ireland’s government is in a sticky situation. Rumor has it that Prime Minister Brian Cowen’s coalition is walking on eggshells right now with its narrow lead as majority in the Parliament. Hmm, was this the reason why bond yields kept rising even after the government announced a package of 15 billion EUR in austerity measures last October 26?
If parliament fails to implement its austerity measures on time, then we might just see the Irish bond yields continue to rise in the markets. This would increase the government’s already swelled budget deficit, and restart another vicious debt-cycle that would have EU, IMF, and Irish officials discussing another bailout request!
Last Tuesday, Greece enjoyed/suffered (depending on how you look at it) the same fate as Portugal on its bond auction.
The Greek debt agency accepted the bid of 4.82% yield for 26-week Treasury bills in order to raise 36 million EUR, which was higher than what it settled for back in October at 4.54%. But I guess beggars can’t be choosers, eh?
Some naysayers think that Greece is lucky enough to have gotten as much moolah despite the political uncertainty brought about by Sunday’s municipal elections. The auction did little help to narrow spreads though. At the end day, the spread between 10-year Greek bonds and German bunds was up 26-basis points to 11.71%.
Lastly, let’s take a look at our amigos over at Spain.
Investors are concerned as to whether Spain can make good on its blood promise to repay its debt. Yield spreads between Spanish and German 10-year bonds are now at 4.50%, after sitting at just over 4.0% a month ago.
Remember, widening yield spreads signal hesitancy from traders on purchasing bonds. The bigger the spread, the more likely traders believe that the government may just default on its debt.
As spreads rise, more investors will worry that Spain will have difficulty in raising funds in the near future. And trust me, the sheer size of Spain’s funding requirements is something that should not be ignored. According to my market spies, Spain’s funding requirements are TRIPLE that of Ireland and Portugal combined, at a massive 350 billion EUR.
If Spain has problems raising funding, where will it get the money that it so desperately needs? That’s right – straight out of the emergency fund that the EU and IMF have put aside.
So as you can see, things are looking a little muddy right now for PIGS (Okay, that was a bad joke). Interestingly enough, it was just about this time last year when Greece’s problems first propped into the market. If these countries continue to show more fiscal problems in the near future, could we see the euro tumbled down the charts yet again?