Stress Tests Pressure European Debt

Greek, Irish and Portuguese notes hit record yields ahead of bank test results.

Greek, Irish and Portuguese two-year notes led declines by securities from Europe’s most indebted nations, while German bunds rose before the publication of stress tests that may show European banks need more capital.

Yields on notes of the three nations to accept international bailouts reached euro-era records, while German 10-year yields headed for a second straight week of declines as investors favored the safest assets amid concern the region’s debt crisis is worsening. Regulators will release test results for 91 banks to help reassure investors that the region’s lenders have enough capital. Standard & Poor’s yesterday became the second ratings company this week to warn that it may cut the U.S.’s top credit grade.

“Uncertainty continues to be very high, and that explains why bunds are stronger,” said Michael Markovic, a senior fixed- income strategist at Credit Suisse Group AG in Zurich. “If we see negative news and surprises from big banks, that would be something that affects the market, and it may lead to a further rally in bunds due to safe-haven flows.”

The yield on Greece’s two-year notes surged 118 basis points to 32.39 percent as of 12:58 p.m. in London, and earlier reached 34 percent. Ten-year Greek yields rose 36 basis points at 17.44 percent.


Bank Assessment
The assessment of European banks is the first by the European Banking Authority since it was established earlier this year. The tests follow criticism of similar evaluations by the EBA’s predecessor last year that found banks needed only 3.5 billion euros ($5 billion) in extra capital. S&P’s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn.

Ireland’s two-year note yield was 84 basis points higher at 22.16 percent, a euro-era high. Spanish 10-year bond yields rose six basis points to 5.92 percent while equivalent-maturity Italian debt yielded 5.67 percent, four basis points more than yesterday.

The 10-year bund yield declined two basis points to 2.72 percent. It reached 2.50 percent on July 12, an eight-month low, amid speculation the debt crisis was spreading to Italy. The 3.25 percent German security due July 2021 rose 0.20, or 2 euros per 1,000-euro face amount, to 104.595. Yields on two-year notes were little changed at 1.23 percent.


U.S. Rating
German government bonds have handed investors 1.9 percent this year, while U.S. Treasuries returned 3.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds lost 20 percent, and Italian bonds 2.5 percent, the indexes show.

European stocks fell, extending their biggest weekly drop since March. Portugal’s two-year note yield jumped 77 basis points to 18.43 percent after touching 18.71 percent, while the nation’s 10-year bond yield increased 13 basis points to 12.76 percent.

S&P said there’s at least a 50 percent chance it will cut the U.S.’s AAA rating by one or two notches into the AA category within 90 days. S&P said the ranking would be at risk if it concludes Congress and President Barack Obama’s administration haven’t achieved a credible solution to the rising government debt burden and aren’t likely to achieve one in the near future.


Bloomberg News



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