Yields are blowing out left and right across the Eurozone today, and it all kind of got going in Greece (remember them?).Citi’s Valentin Marinov explains:
Comments by Finance Minister Papaconstantinou earlier today that Greece will struggle to return to the markets next year and weak Greek labour market data triggered a renewed widening of the euro zone peripheral spreads (Figure 1). The next trigger for a leg lower in EUR could be the looming prospect of Greek debt restructuring. This could lead to greater losses for the Greek, German and French banks holding government paper than is currently assumed under the stress tests for the euro zone banking sector.
The massive widening in Greek sovereign spreads to Germany of late reflects investor concerns that, come 2013, the Greek authorities would be forced to tap the successor of the EFSF – the ESM. ESM funding will be senior debt while the EFSF funding is not. Adding a new layer of ESM funding on the top of the existing Greek debt from 2013 onwards mea ns that existing bond holders could be squeezed in any debt restructuring. Coupled with further deterioration of the Greek economy this increases the chances for bigger haircuts two years down the line.
And the problems aren’t limited to Greece:
Should the move wider in peripheral spreads persists and fuels more contagion to Spain, the issue with the true amount of potential losses of the Spanish Cajas could come to the fore yet again. Also, the Finish election is this weekend. The True Finns have considerable poll support and oppose any extension of the EFSF. The prospect of Spain having to tap the EFSF coupled with growing market uncertainty about the extension of EFSF in June could add to the pressure on the single currency going forward.
Haven’t been following the True Finns? Catch up here.
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