Thursday, March 03, 2011

Update on European Financial Crisis and Bond Yields

by Calculated Risk on 3/03/2011 04:47:00 PM

The European financial crisis has been simmering in the background, but will probably become front page news again this month. There are several meetings schedule in March, starting tomorrow in Helsinki, and then a special eurozone debt crisis summit on March 11th.

Also the European Banking Authority has now launched the next round of bank stress tests.

The EBA’s Board of Supervisors agreed to launch the 2011 EU-wide stress testing exercise with National Supervisory Authorities on 4 March 2011. The stress test, which will be conducted on a large number of European banks, involves a series of detailed technical steps and, as a consequence, will take several months to run. It will be run against a baseline and an adverse macro economic scenario in order to assess the solvency of the banks involved in the exercise against hypothetical adverse economic events. The adverse macro-economic scenario, designed by the ECB, will incorporate a significant deviation from the baseline forecast and country-specific shocks on real estate prices, interest rates and sovereigns. This is in line with the EBA’s micro-prudential objective of analysing institution-specific prudential soundness

The EBA will provide the banks with details of the scenarios by the end of this week, after which there will be a period of discussion and feedback. The EBA plans to publish the macro-economic scenarios along with the sample of banks involved, on 18 March 2011. ... the EBA anticipates being able to publish the broad principles of the stress test methodology in April. Following a vigorous peer review, the EBA will publish the final results of the exercise in June.
And I should mention that European Central Bank President Jean-Claude Trichet said today "Strong vigilance is warranted with a view to contain upside risks to price stability." and many view that wording as suggesting a rate hike is coming at the next meeting.

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of March 2nd):

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.

Since the January FOMC meeting, the 10-year Greece-to-German bond spread has widened by 102 basis points (bps), through March 1. Similarly, the spread for Ireland is 37 bps higher; it is 39 bps wider for Portugal but has actually declined somewhat for Spain.
Here are the Ten Year yields for Ireland, Portugal, Spain, Greece, and Belgium (ht Nemo) All moving up some more today ...