Restructuring Fears Lowered Greek Debt

Greek sovereign debt yield jumped after increased fear for restructuring of the debt. Today Ireland

(15.04.2011) Greek sovereign debt yield jumped after increased fear for restructuring of the debt. Today Ireland was downgraded by Moody's.

By Kyrre Aamdal, Senior Economist at DNB Markets

The USD is about unchanged versus the Euro from yesterday morning. Both the Norwegian and Swedish kroner have strengthened versus the Euro and thus versus the USD. Major indices for the U.S. stock market ended just above the levels from the day before. The Nikkei 225 fell today, but the Hang Seng index is up from yesterday.

Moody's cut Ireland's sovereign rating by two notches and kept its outlook on negative, a day after fellow ratings agency Fitch upgraded its outlook for the country, Reuters stated this morning. According to Moody's the downgrade from BAA1 to BAA3 was due to the expected decline of the governments financial strength, the country's weaker economic prospects and uncertainty around solvency tests required by the European Stabilization Mechanism (ESM). Moody's now rates Ireland two notches below ratings from Standard and Poor's and Fitch. Moody's said the country may need to take further austerity measures to meet its fiscal goals and that its financial position may suffer as a result of the ECB's interest rate hikes.

Greek sovereign debt yields jumped yesterday after comments from the German finance minister Wolfgang Schäuble. Greece's George Papaconstaninou had told Financial Times that Greece needed more time to convince bond market investors of its commitments to reform its finances. Greece’s budget plans are fully funded this year but Athens will have to raise between  EUR 25bn- EUR30bn on financial markets in 2012.

According to Financial Times Mr Papaconstantinou said the reform programme proved longer and harder and that they need "… more time, not in terms of a new programme but to convince". Germany's finance minister referred to a report under way. If this report concluded that the Greece's debt levels were unsustainable, further measures have to be taken. According to FT.com he ruled out any involuntary restructuring before 2013, but warned that investors could face losses after that point. These viewpoints are not new, but when they come from the German finance minister market reactions were significant.

Greek 10y sovereign debt yield increased 36 basis points to 13.27 percent, and the two year yield increased 90 basis points to 17.83 percent. The CDS premiums increased substantially to new heights. And Portuguese's and Irish's CDS were contaminated. However, Spanish's CDSes did actually decline a few basis points from the previous day.

U.S. producer prices increased 0.7 percent m/m in March. The annual PPI inflation rate increased up to a 12-month high of 5.8 percent, from 5.6 percent in February. The biggest factor behind last month's increase was again gasoline prices, which increased by 5.7 percent m/m, while food prices fell back by 0.2 percent in March. Excluding food and energy, core producer prices increased by 0.3 percent m/m, a bit above expectations. The main driving forces in the core were the 0.9 percent m/m surge in passenger car prices and the 0.7 percent increase in light truck prices. Aside from the surge in food and energy prices, core PPI inflation is still pretty contained at 1.9 percent.

Today the more important consumer prices for March will be released. So far there is little reason to believe that the March reports of producer and consumer prices will alter the Fed's stance that it can ignore the commodity price spike. At least not as long as inflation expectations remain contained and there are no signs of second round effects emerging in wage and core price inflation.

In China GDP
increased 9.7 percent y/y in Q1. The major contributor was private consumption. Inflation keeps running up with 5.4 percent y/y in March, more than expected. Food prices are the main contributor, but also housing costs have increased strongly. The recent figures points towards further policy tightening.