by Calculated Risk on 1/06/2011 02:03:00 PM

From the WSJ: EU Proposes Plan for Bank Failure

The EU executive arm, the European Commission, Thursday released a hefty 100-plus page consultation paper open to public comments until March 3, which aims to abolish the excuse that a bank is too big to fail. It asks whether bank bond holders should share in paying for future bailouts ...

[A] diplomat added: "The overriding objective is to make sure creditors bear the appropriate share of losses of a failing bank and these aren't immediately passed along to taxpayers."

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Jan 4th):

Click on graph for larger image in new window.

From the Atlanta Fed:

Greek, Irish, and Portuguese bond spreads (over German bonds) continue to be elevated, rising since the December FOMC meeting.

Since the December FOMC meeting, the 10-year Greek-to-German bond spread has widend by 105 basis points (bps) (from 8.85% to 9.90%) through January 4.

Similarly with other European peripherals’ spreads, Portugal’s is 38 bps higher, and Ireland’s spread is 88 bps higher.

Note: the Atlanta Fed has added Belgium.

The bond yields have increased today. The Portugal 10 year is at 6.96%, the Ireland 10-year bond yield is over 9%, and the Greece 10-year bond yield is at a record 12.64%.

Clearly investors are pricing in a haircut.