Irish, Portuguese, Spanish Bond Whacked; France Joins Germany in Proposals to Make Bondholders Share the Pain; Trichet Supports "Extend and Pretend"

A pair of articles on Bloomberg highlight the ongoing mess in Europe. Please consider Irish Debt Falls for 13th Day on Default Concern; Bunds Climb

Irish government bonds tumbled for a 13th day on mounting concern that the nation will be forced to restructure its finances.

Spanish bonds also headed for a 13th day of declines as data showed the nation�s economic growth stalled. French Finance Minister Christine Lagarde said yesterday that investors must share in the cost of safeguarding sovereign debt. German bunds advanced on demand for the safest assets, while Portuguese debt recovered from earlier losses. Italian bonds fell.

�Lagarde�s comments mentioned restructuring, and that�s another nail in the coffin� for so-called peripheral nations� debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. �There�s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.�

The best bid for Irish 10-year bonds was 9.07 percent, or a price of 74.09, while the nearest offer was at 8.61 percent, or a price of 76.55, Bloomberg data show.

�The wide bid-offer spread indicates how thin trading has become, and reflects a lack of two-way market activity,� said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London.

For 10-year bunds, the difference between the bid and the offer was less than one basis point, the Bloomberg data show.

The Spanish-German 10-year yield spread widened to 215 basis points today from 206 yesterday. That�s still below an intraday euro-era high of 232 basis points reached on June 17.

The Italian 10-year bond fell for a sixth straight day, its longest run of declines since June, before the nation sells as much as 8.25 billion euros of 2015, 2026 and 2034 debt tomorrow.

The spread against bunds was at 176 basis points, up from 166 basis points yesterday. That compares with a peak of 185.5 basis points reached on June 8.

�Italian paper has been under pressure recently on a combination of periphery woes and political uncertainty,� Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, wrote in an e-mailed report today. �We expect demand at tomorrow�s auction to be good,� with �support from the current level of spread,� she said.

Ganging Up on Bondholders

Bloomberg reports France Joins Germany Ganging Up on Bondholders

French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

�All stakeholders must participate in the gains and losses of any particular situation,� Lagarde said during an interview yesterday in Paris for Bloomberg Television�s �On the Move� with Francine Lacqua. �There are many, many ways to address this point of principle.�

�Lagarde�s comments mentioned restructuring, and that�s another nail in the coffin� for peripheral debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. �There�s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.�

�We do also need creditors to be involved in the costs of restructuring,� Merkel said today in Seoul, where she�s attending a summit of the Group of 20 leaders. �There may be a conflict here between the interests of the financial world and the interests of politicians. We can�t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks. I ask the markets sometimes to bear politicians in mind, too.�

Trichet�s Stance

Trichet says such talk risks exacerbating the situation for indebted nations as they struggle to cut their budget deficits.

�The more you talk about restructuring debt, the harder it is to obtain debt,� Irish Finance Minister Brian Lenihan said Nov. 2. �That is the reality.�

Nonsense from Trichet

Trichet's idea of a solution is "don't talk about it and the problem will go away". Well it won't. Nor will "extend and pretend".

The US made a serious mistake in not making bondholders share the pain in US bank bailouts. As a result, US banks are still undercapitalized, crippled, and unwilling to lend. The reality is there is no painless solution no matter what Trichet, any central bankers, or any politicians think.

A further reality is that Ireland made a huge mistake in agreeing to horrendous austerity measures instead of just plain defaulting. That would have forced the restructuring issue to the forefront, long ago.

And as long as we are talking about realities, here is an obvious one that Trichet does not seem to understand: What can't be paid back, won't.

By the way, these renewed concerns about Europe are on balance, US dollar supportive.

Those Who Take Risks Should Pay For Them

Three cheers to Merkel for stating this reality "We can�t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks."

Here's one more reality for the road: Those who take the risks should pay for them. It's the only thing that makes any sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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