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Thursday, March 31, 2011

Irish Bank Stress Tests and European Bond Spreads

by Calculated Risk on 3/31/2011 05:18:00 PM

On the Irish banks from the Irish Times: Irish banks require an extra €24 billion recapitalisation

Ireland’s beleaguered banking sector is to be recapitalised by a further €24 billion and restructured around two core retail banks ... This is the fifth attempt to recapitalise the banks and brings the total cost of bailing out the sector from €46 billion to €70 billion.
[Minister for Finance Michael Noonan] indicated the Government would seek "significant contributions" from subordinated bondholders in the banks to contribute to the cost of recapitalising the sector.

Mr Noonan also signalled the Government was no longer considering the imposition of losses on senior bondholders in Bank of Ireland and Allied Irish Banks. However, he said the Government but would re-examine the possibility of imposing losses on senior bondholders at Anglo Irish Bank, if that lender required additional capital.
Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of March 30th):

Euro Bond Spreads Click on graph for larger image in new window.

From the Atlanta Fed:
Most peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal, with the latter two countries seeing their financial situations worsening.

Since the March FOMC meeting, the 10-year Greece-to-German bond spread has declined by 38 basis points (bps), through March 29. Also, the Spanish spread has declined by 17 bps.

However, the spread for Ireland and Portugal has risen by 49 bps and 44 bps, respectively.
Here are the Ten Year yields for Ireland, Portugal, Greece, and Germany. The spreads to Germany widened more today with Greece up to 948 bps, Ireland up to 687 bps, and Portugal up to 505 bps. The good news is the spreads have been declining for the other European countries.