Category: Market Action

There’s some cheerleading for solar power:

Electricity from coal costs about 7 cents a kilowatt hour compared with 6 cents for natural gas and 22.3 cents for solar photovoltaic energy in the final quarter of last year, according to New Energy Finance estimates.

Comparisons often overstate the costs of solar because they may take into account the prices paid by consumers and small businesses who install roof-top power systems, instead of the rates utilities charge each other, said Qu of Canadian Solar.

I’ll believe it when I see it.

There are more cross-currents in the Fed Funds rate:

U.S. money market rates dropped to about one-year lows as a change in deposit insurance fees makes some banks reluctant to lend securities and the Treasury reduces issuance of bills to avoid exceeding the debt limit.

The average rate for overnight federal funds, known as the fed effective rate, fell to 0.09 percent yesterday, the lowest since June. The rate was 0.18 at the start of the year. The average rate for borrowing and lending Treasuries for one day in the repurchase agreement market fell to 0.028 percent, the lowest since at least May 3, 2010, or as far back as index data is provided by the Depository Trust & Clearing Corp.

The Federal Deposit Insurance Corp. began last week to adjust calculations of U.S. banks’ deposit insurance fees to include all liabilities rather than just domestic deposits. The Treasury has reduced the amount of Supplementary Financing Program bills, or SFPs, it sells on behalf of the Federal Reserve by $195 billion to help avoid exceeding the U.S. debt limit.

“The new FDIC assessment structure, while intended to better protect taxpayers from large bank failures, has distorted activity in the short-term rates markets,” Brian Smedley, a strategist in New York at Bank of America Merrill Lynch, said in an interview. “This change will discourage opportunistic borrowing by insured banks in the fed funds and repo markets in particular, as banks will avoid leveraging their balance sheets unnecessarily to reduce the fees they pay the FDIC.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 5bp, and DeemedRetractibes losing 11bp. Volatility was minimal, volume was reasonable.

National Bank issues subject to the issuer bid feature in the volume highlights as the deadline approaches. The prices are now reasonable relative to the tender price, although note that this is the last day of cum-dividend trading. Tomorrow they are ex-Dividend and it will be the last day to trade for regular settlement that will settle on the tender date.

The predicted hike in the European policy rate is causing some angst:

Primed to raise its benchmark interest rate this week for the first time in almost three years, President Trichet’s European Central Bank again faces the conundrum that its monetary policy rarely suits all 17 members of the euro area, where the kaleidoscope of growth ranges from record expansion to recession paired with a sovereign-debt crisis.

The upshot may be that the normalization of rates from a record low of 1 percent will disproportionately hurt Spain, Greece, Portugal and Ireland, while failing to nip inflation threats in Germany. Such uneven fallout risks exacerbating the two-speed European recovery and dealing further damage to the bonds of so-called peripheral nations.

But the outlook for Treasuries continues to be bright (according to some):

Treasuries are signaling that the $9 trillion market will weather the end of the Federal Reserve’s quantitative easing program in June without suffering a selloff that drives long-term borrowing cost higher.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010.
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Rising demand from international investors and financial institutions bodes well for bonds with the Fed’s plan to buy more than $600 billion of Treasuries more than 80 percent complete. U.S. fixed-income assets are retaining their appeal as the credit quality of European sovereign debt deteriorates and banks meet tighter risk standards governing the capital they need cushion against losses.

Algos gone wild? RBC bought 2100 shares of CIU.PR.C in 12 transactions starting at 25.05 at 12:04pm and finishing at 27.00 at 12:18. Too much time-span to be a retail market order … I wonder what happened there? The lucky seller was Byron Securities (who?), which sold 900 shares at an average price of 25.85.

Other than that, it was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts down 1bp, FixedResets gaining 4bp and DeemedRetractibles up 5bp. Only three entries on the performance highlights table, and volume was nothing special.

There’s a new bid for the NYSE:

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) made an unsolicited bid of about $11.3 billion for NYSE Euronext, trying to snatch the owner of the New York Stock Exchange away from Deutsche Boerse AG. (DB1)

Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

Ireland’s credit rating has been cut again:

Ireland’s credit rating was cut one level by Standard & Poor’s and put on watch for a possible downgrade by Fitch Ratings after the cost of rescuing Irish banks reached as much as 100 billion euros ($141.5 billion).

S&P today lowered the rating to BBB+ from A-, putting the country on the same level as Thailand and the Bahamas. The outlook is stable, S&P said in a statement. Fitch placed its long-term foreign and local-currency issuer default ratings of BBB+ on negative, “indicating a heightened probability of a downgrade in the near term,” it said in a statement.

But the interesting part is the wrangling over the banks’ senior debt:

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”
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During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
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The cost of insuring against losses on the senior debt of European banks fell to the lowest in more than five months today. The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers, dropped as much as 6 basis points to 137, the lowest since November 19, before paring the decline, according to JPMorgan Chase & Co. Credit-default swaps on Portugal, Ireland, Greece and Spain also declined.

California has problems of its own:

[California Governor Jerry ] Brown said yesterday he’s also putting together a plan to deal with the growing gap between assets and expected obligations of the California State Teachers’ Retirement System, the second-largest public pension in the U.S.

Calstrs’ so-called unfunded liability grew to $56 billion at the end of June, according to a report released yesterday. The 38 percent increase will require the state to boost its annual contribution by $140 million to $150 million, according to the pension fund. California paid $573 million toward teacher retirements last year.

Since 1999, teachers have been allowed to purchase up to five years of service credit to retire early and collect a full pension. Brown would repeal that benefit beginning in July.

DBRS has published a comment letter on the new ESMA guidelines:

The Consultation Paper seeks to clarify the endorsement regime and update the endorsement guidelines. ESMA currently interprets that “as stringent as” CRA requirements must be established by law or regulation in a third country by June 7, 2011 in order for the use of endorsement. It does not currently support the interpretation that a third country CRA would be permitted to follow “as stringent as” standards through its own policies and procedures. The Consultation Paper states that the CRA Regulation does not envisage a dual system of compliance or some combination of a third country legal/regulatory regime topped up by policies and procedures adopted by the third country CRA.

By way of background, endorsement allows the use in the EU of ratings issued outside the EU under certain conditions.
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DBRS does not support ESMA’s current interpretation that it cannot supervise EU-registered CRAs who use endorsement without an equivalent third country regulatory regime in place. The key test should be whether a third country CRA adheres to standards as stringent as those required by the CRA Regulation, whether or not a third country regime has been enacted into law.

Endorsement is important because, according to the consultation paper:

A credit rating that a registered CRA endorses in compliance with the conditions set out in article 4.3 “shall be considered to be a credit rating issued by a credit rating agency established in the Community and registered in accordance with this Regulation” (art. 4.4). These ratings can be therefore used for regulatory purposes and be distributed to the public by registered CRAs.

This endorsement process started in October, 2009. The Canadian Securities Administrators published proposed regulatory changes on March 18, due to pressure from the Europeans:

The CESR’s stance is that the “comply or explain” model is insufficient, and thus they indicated to the CSA that they would not provide an equivalency recommendation to the European Commission should the CSA proceed on that basis. As the CSA notes in the introduction to the revised proposal, it’s a threat worth paying attention to:

The failure to obtain an equivalency determination from the European Commission, and the consequent inability of a CRO that issues ratings out of Canada to rely on the endorsement or certification models in the EU Regulation, would have a negative impact on such CROs. The issuers that such CROs rate might also be negatively impacted to the extent those ratings are used for regulatory purposes in the European Union.

As a result, the CSA are now proposing that, in the absence of exemptive relief, DROs must establish codes of conduct which do not deviate from the provisions set out in the proposed Instrument. Those provisions have also been revised somewhat, to require that a DRO establish certain governance protections, such as a majority of independent directors, and a formal internal controls system.

Thus, we finally have a clear statement from the regulator that Credit Rating Agencies have the function of cheerleading for issuers. Yay.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 3bp, FixedResets up 9bp and DeemedRetractibles gaining 6bp. Volatility was muted, volume was fair.

Europe’s on credit watch:

Moody’s Investors Service said it can’t rule out further credit downgrades for euro-region nations because the agreement on a permanent bailout fund, the European Stability Mechanism, doesn’t go far enough.

European Union leaders met March 25 and set out new rules on bailout loans. Their failure so far to provide a permanent system whereby stronger nations support the finances of their weaker counterparts leaves bondholders at risk, Moody’s said.

“The absence of a fiscal-transfer mechanism and the conditions under which assistance will prospectively be made available leave downside risk to private creditors,” the rating agency said in an e-mailed report today. “Consequently, further rating downgrades cannot be ruled out.”

… so the ECB is suspending credit quality requirements:

The European Central Bank said it will accept all debt instruments backed by the Irish government as collateral against ECB loans as the country attempts to shore up its banking industry.

The Frankfurt-based ECB said Ireland’s commitment to recapitalize its banks and comply with a consolidation program prescribed by the European Union and International Monetary Fund must be assessed “positively.” The suspension of the minimum credit-rating threshold is based on “this positive assessment of the program,” a capital increase for Ireland’s four banks and the decision to “deleverage and downsize the banking sector,” the ECB said.
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It is not the first time the ECB has loosened its collateral rules to help a euro-area member state in distress. In May last year, the ECB announced it would accept all Greek government debt as collateral when lending to banks, suspending minimum credit-rating thresholds to support a 110 billion-euro bailout of the debt-strapped nation. Ireland was the second of the now 17 euro-area members to receive a bailout last year.

The ECB “deems debt instruments issued or guaranteed by the Irish government to fulfill the credit standards required for collateral in Eurosystem credit operations,” the bank said. “The relevant risk control measures will be reviewed on a continuous basis.”

It was a good day to end the month in the Canadian preferred share market, with PerpetualDiscounts gaining 10bp, FixedResets exactly flat and DeemedRetractibles winning 13bp. Volatility was muted, with only two entries on the Performance Highlights table. Volume was average.

Europeans seem to want to blame commodity price inflation on speculators – Hoenig blames the Fed:

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and the lone dissenter at Fed meetings last year, said in the text of a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

This was also discussed in the post QE2 and Inflation.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts getting whacked for 23bp, FixedResets down 2bp and DeemedRetractibles gaining 10bp. Not a lot of volatility, with only three entries in the Performance Highlights table. Volume was above average.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at this year’s standard conversion factor of 1.3x. Long Corporates now yied 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 170bp, a significant tightening from the 180bp reported on March 23.

How ’bout them US house prices, eh?:

The S&P/Case-Shiller index of property values in 20 cities fell 3.1 percent from January 2010, the biggest year-over-year decrease since December 2009, the group said today in New York. The decline was in line with the 3.2 percent median forecast by economists in a Bloomberg News survey.

Rising foreclosures are swelling the number of houses on the market, which may put additional pressure on prices in coming months. At the same time, a further decline in home values may keep potential buyers on the sidelines as they foresee better deals, hurting construction and consumer spending as owners’ equity evaporates.

It’s an ill wind that blows nobody any good. We may be witnessing the birth of a few residential real-estate empires:

Delavaco Properties LP plans to spend as much as $30 million this year and $40 million in 2012 to buy bank-owned houses and condominiums in foreclosure-ridden South Florida. The private-equity fund will pay cash.

As lenders tighten mortgage standards and consumers stay on the sidelines amid a five-year slide in home prices, all-cash purchases are surging. The deals are done mostly by investors who can get properties for less than buyers needing loans, fix them up and resell or rent them.

But there’s finally a start to the eventual wind-down of Fannie & Freddie:

U.S. House Republicans proposed legislation that would begin reducing the influence of government-run mortgage companies Fannie Mae and Freddie Mac.
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Representative Scott Garrett, a New Jersey Republican and chairman of the capital markets panel of the House Financial Services Committee, is leading the effort. Most of the Republican proposals line up with a list of recommendations put forth in February by the Treasury Department and the Department of Housing and Urban Development. Garrett’s panel will hold a hearing on March 31 on the proposals.

When it comes to the Treasury, “at the end of the day, we have the same ultimate goal to achieve here,” Garrett said at a press conference today. “If you look through their white paper, if you look at what we have, in essence we’re on the same page.”

Won’t last though – politicians love loan guarantees. ‘We can Do Good, and it doesn’t even cost anything!’

Europe’s politicians might find it harder to get co-investors:

Portugal and Greece were downgraded by Standard & Poor’s, which said the European Union’s new bailout rules may mean that both nations eventually renege on their debt obligations.

S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece’s rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries may be forced to restructure debt after seeking European aid and that governments will be paid back before other creditors.

It was a strong day on the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets up 13bp and DeemedRetractibles gaining 9bp. Volume was good and volatility jumped.

Holders of Lehman PPNs are getting 80% of their principal back:

Most Hong Kong holders of structured financial notes linked to Lehman Brothers Holdings Inc. (LEHMQ) will get more than 80 percent of their investment in the latest settlement, receiver PricewaterhouseCoopers LLP said.

The agreement, which covers most issues of the minibonds, will offer holders “significant recoveries” on their investment, according to statements by PricewaterhouseCoopers and 16 banks involved issued at a Bank of China Ltd. (3988) briefing in the city today.

About 43,000 investors in Hong Kong bought an estimated $1.8 billion of Lehman minibonds that were sold by commercial lenders before the New York-based investment bank’s 2008 collapse.
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BOC Hong Kong (Holdings) Ltd., the Bank of China’s Hong Kong unit, and 15 other banks agreed to pay at least 60 cents on the dollar, for a total of HK$6.3 billion, in a settlement reached with the Securities and Futures Commission and the Hong Kong Monetary Authority.

BOC, the biggest seller of the notes in the city, offered in July 2009 to pay HK$3.11 billion ($400 million) to the Lehman minibond investors, almost half the total compensation extended by the 16 banks, while two units of Dah Sing Financial Holdings Ltd. will pay HK$444 million.

The notes have been characterized as almost worthless, so this is just another case of regulatory extortion. For a good laugh, try a Google search of “Lehman structured Notes” – it’s a good way of getting a list of ambulance-chasing legal firms.

In other adventures of the BooHooHoo Brigade, interest rate swaps are in the news again:

Faced with shrinking income and growing expenses, Italian cities bought swaps that would typically offer lower interest expenses in the near-term, while exposing the buyers to the risk of increased interest costs in later years. Italian cities faced losses of at least 1.2 billion euros from the transactions as of June, data compiled by the central bank show.

Cassino entered a seven-year swap with Bear Stearns in 2003 to adjust payments on about 22 million euros of debt. The swap switched the city’s 4.7 percent fixed interest rate payment for a variable rate, according to a June 2009 report by Italy’s financial police.

The city paid a floating rate based on the U.S.-dollar London interbank offered rate, an “extremely risky” bet given that Libor was at a record low, the police said in testimony to the Italian Senate in 2009.

Who needs investment managers when you’ve got the police? Fortunately, there’s a good laugh later in the story:

Bloomberg News sued the European Central Bank in December to make it release documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis. The case is pending.

Why, I’m sure the ECB knew nothing about it! It was a complete surprise! It was all Goldman’s fault!

The New York Fed’s blog has a piece by Beverly Hirtle addressing the question How Were the Basel 3 Minimum Capital Requirements Calibrated?. The blog itself, newly inaugurated and titled Liberty Street Economics, has been added to the blogroll.

I can’t help talking about the Toronto Community Housing Corporation thing, because it’s so illustrative of bad government and politics by sound-bite. A Toronto Star piece titled TCHC fête featured chocolate fountain and crème brulee makes the startling revelation:

The 2008 party for TCHC staff featured a chocolate fountain, an Italian spumante and strawberries station, crème brulee and a deluxe antipasto bar that included hot grilled calamari, mussels and smoked salmon.

In attendance were 760 guests, and the final bill from the Montecassino banquet hall in North York came to $47,715. Throw in costs for entertainment and other items, and TCHC forked out $53,500.

It was a significant change from the year prior. The 2007 celebration was a smaller scale event — 420 TCHC guests attended — and featured a less elaborate menu. Guests ate from an antipasto bar with no seafood, while chicken and pasta dishes were served at their tables.

The bill from Montecassino was $22,368.

OK, so this shocking news means that in 2008 the TCHC spent $70/head, while in 2007 the tab was $53/head. Hands up everybody who works for a major corporation that spent less than $100/head on their Christmas party! Don’t be shy … well, I didn’t think so.

Don’t get me wrong. There’s a lot wrong with the civil service in general and the TCHC in particular – but my desire for the efficient provision of services does not extend to treating staff like dirt on a permanent basis. When you treat your employees like shit, guess what kind of employees you get? I want them fired for incompetence, sure – that alone will save enough money to fund a hundred Christmas parties annually – but when it comes to governance I’d much rather talk about the single-source contracts that never get talked about.

It was another good day on the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets gaining 17bp and DeemedRetractibles winning 3bp. Not much volatility, with only two entries on the Performance Highlights table. Volume exploded and was very heavy … window dressing for quarter end?

The quote for CM.PR.K listed in the Wide Spreads table is a disgrace. Readers will remember that the reported value is the Last Quote, which may be wider than the Close. I have attempted to purchase Trades and Quotes for the issue, but all I get are trades. The TMX has been queried regarding this apparent shortcoming in their software. [See Update, below]

Update, 2011-3-30: The TMX has sent me the Trades and Quotes report that I attempted to purchase. They are trying to determing why my attempt was unsuccessful and desperately clinging to the hope that it was somehow all my fault.

The last trade was at 15:56:27, for 100 shares at the offer price of 26.70. There were then 12 quotes prior to the close as algorithms jockeyed for position; the bid changed once, from 800@26.62 to 200@26.63; the offer bounced mainly lower, from 100@26.70 to 200@26.68. The closing quote was 26.63-68, 2×2. The offer was cancelled at 16:16:01 and the bid at 16:16:09, resulting in a Last Quote of 26.62-28.83, 800×400.

Portugal’s problems deepened:

Portugal doesn’t need a rescue, Prime Minister Jose Socrates said in Brussels, seeking to counter speculation of a bailout as talks began in Lisbon to end the political limbo after lawmakers rejected his budget cuts.

Portuguese bonds fell, driving their yield to a euro-era record as investors anticipated that the country would follow Ireland and Greece in seeking a financial lifeline. A bailout may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said yesterday.
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The political deadlock comes as downgrades to Portugal’s credit rating threaten to deepen its debt woes. Standard & Poor’s and Fitch Ratings both cut Portugal’s rating yesterday.
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Portugal’s 10-year yield advanced as much as 14 basis points to 7.80 percent. The difference in yield that investors demand to hold the securities instead of German bunds widened 10 basis points to 451 basis points, the most since November. The Portuguese two-year yield increased as much as 38 basis points to 7.09 percent.

Opposition parties united to reject additional cuts that were the equivalent of 4.5 percent of gross domestic product over three years. The package included a reduction in pensions of more than 1,500 euros a month and further decreases in tax benefits. The government said the extra measures were needed to trim the deficit to 4.6 percent of GDP this year and within the EU’s 3 percent limit in 2012.

The Invisible Man would like us to believe that he has finally grown a pair:

The second minority government of Stephen Harper has fallen.

Early Friday afternoon, 156 opposition MPs – all of the Liberals, New Democrats and Bloquistes present in the House of Commons – rose to support a motion of no-confidence.

It was also a motion that declared the government to be in contempt of Parliament for its refusal to share information that opposition members said they needed to properly assess legislation put before them.

… but they’re probably just tied on with string.

There was a slight upward trend in the Canadian preferred share market today, with PerpetualDiscounts exactly flat (!) and both FixedResets and DeemedRetractibles up 4bp. Volatility increased a little, but volume remains anemic.

Update, 2011-3-29: It took four days, but I was finally able to get Trades & Quotes data from the TMX – they had to recover it manually because their software isn’t working properly, as far as I can see.

Anyway, in the period from 15:47:31, when 400 shares traded at 26.80, until the close at 16:00:00, there were 214 different quotes, all with a bid for 300 shares at 26.75 as algorithms jockeyed for position on the offer side. In this period the lowest offer was at 27.03, the highest at 28.25. There were nine instances of the offer side being 28.25.

The Closing Quote was 26.75-16, 3×1. At 16:15:03 the offer of 100 shares at 27.16 was cancelled, resulting in a Last Quote of 26.75-28.25, 3×4.

Pressure on Spain is increasing:

Thirty of Spain’s smaller banks had their senior debt and deposit ratings downgraded, as Moody’s Investors Service reviews whether governments are willing to support all their lenders in a crisis.

Citing heightened financial pressure on the country’s sovereign rating and “many weak banks,” the New York-based ratings firm cut 15 lenders by two levels and five by three or four, according to a statement today. The outlook on most banks’ senior and deposit ratings remains negative, Moody’s said.
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In Denmark, where senior bondholders of Amagerbanken A/S were forced to take losses, the firm cut the grades of five lenders and may cut them again.
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Spain’s credit rating was cut to Aa2 on March 10 by Moody’s, which said the cost of shoring up the banking industry will eclipse government estimates. The ratings company said then that Spanish lenders may need as much as 50 billion euros ($70.3 billion) to meet new capital requirements, a figure that compares with the Bank of Spain’s estimate that 12 lenders will need 15.2 billion euros.

The Amagerbanken failure is causing some debate:

Denmark is trying to persuade the rest of Europe to match rules exposing bondholders to losses after the failure of a regional bank last month left lenders in the Nordic country risking higher funding costs.

The collapse of Amagerbanken A/S on Feb. 6 forced a 41 percent loss on unsecured senior bonds and prompted Moody’s Investors Service 10 days later to cut ratings on five Danish lenders, including Denmark’s biggest, Danske Bank A/S, as it factored out state protection. The insolvency was the first to test rules Denmark put in place in October and set a European Union precedent for senior creditor losses amid a region-wide debate on burden sharing.
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Denmark is arguing the financial crisis hasn’t adequately stemmed risk-taking amongst bond investors and wants the EU to enforce the “possibility of debt writedowns” to discipline markets, according to a March 4 letter sent to the European Commission. EU financial services chiefMichel Barnier in January said bank regulators should be able to write down lenders’ senior debt, though a final agreement has yet to be reached.

European leaders are trying to put in place measures to protect taxpayers from having to rescue failing banks after Ireland guaranteed six lenders in 2008.

There are already measures in place to protect taxpayers from having to rescue failing banks: it’s called bankruptcy. The problem only arises because governments are desperate to pretend that everything is normal, and to keep their failed banks lending merrily away – as long as it’s for socially uselful purposes, of course.

But the punchline of the story came, naturally enough, at the end:

Denmark, home to the world’s third-largest mortgage-backed bond market after the U.S. and Germany, is trying to persuade the EU that the debt deserves a higher liquidity grade than the Basel Committee for Banking Supervision agreed on in December.

The covered-bond market may also become more liquid as investors spooked by the threat of losses on other debt classes turn to bonds backed by collateral, according to Fitch Ratings Ltd.

“The growing use of covered bond funding by banks is a trend set to continue,” Fitch analysts Helene M. Heberlein, Bridget Gandy and Jan Seemann said in a March 10 note. Issuers are also adding surplus collateral to the pool backing the bonds to attract investors, leaving less behind to cover other debt classes, Fitch said.

“There must be no doubt that holders of covered bonds and junior covered bonds always will receive timely payment,” Denmark’s government said in the March 4 letter. “It should therefore be made clear that covered bonds and junior covered bonds should not be subject to debt write downs.”

Hey – if the rules can be changed retroactively for senior debt, why can’t they be changed retroactively for covered bonds? What has Denmark done to defend the primacy of the rule of law?

With all that, Europe is taking decisive action:

As speculation swirled that Portugal will be the next victim of the crisis, the leaders bowed to German Chancellor Angela Merkel’s call to pare the fund’s paid-in capital as of 2013 to 16 billion euros ($23 billion), less than the 40 billion euros foreseen in a March 21 accord.

“It was a difficult debate with Germany,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after the first session of an EU summit in Brussels early today. “Germany found that in the compromise agreed last Monday it would have to pay in too much. So we had to tackle that issue.”
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Standard & Poor’s might take struggling countries down another notch, since the future fund — known as the European Stability Mechanism — will outrank private bondholders, said Moritz Kraemer, managing director of European sovereign ratings in Frankfurt.

Ratings Reassessment
“We would reassess the ratings specifically of Greece and Portugal, which we think are the most likely potential customers of the ESM,” Kraemer said on Bloomberg Television today.

Portuguese bonds fell for a fourth day today, pushing the 10-year yield up 13 basis points to 7.79 percent. The extra yield over German bonds, a sign of the risk of investing in Portugal, rose 10 basis points to 452 basis points.

It’s a bit like problems with US Health Care:

Aetna Inc. (AET) is suing six New Jersey doctors over medical bills it calls “unconscionable,” including $56,980 for a bedside consultation and $59,490 for an ultrasound that typically costs $74.

The lawsuits could help determine what pricing limits insurers can impose on ”out-of-network” physicians who don’t have contracts with health plans that spell out how much a service or procedure can cost.

Shouldn’t be any limits on doctors at all. The limits should be on how much the insurer will reimburse the insuree … “If you need an ultrasound, we’ll reimburse you 100% of the amount under $75 and 50% of the amount between $75 and $125, and 0% of the amount over $125, and here’s a list of places where you can get it done for $74.” But then insurers, companies, doctors, patients and politicians wouldn’t be able to pretend everything was free.

It was another good day on the Canadian preferred share market with PerpetualDiscounts up 11bp, FixedResets gaining 8bp and DeemedRetractibles winning 7bp. Volatility was muted, with only two entries in the Performance Highlights table; volume was anemic. Is it Christmas, or what?

Crisis in Portugal:

Portuguese Prime Minister Jose Socrates tendered his resignation after plans to cut the budget were rejected by parliament, pushing the country closer to an international bailout.
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Portugal has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall. Additional cuts, announced on March 11, prompted a political backlash and failed to persuade investors.

The spread between Portuguese and German 10-year bond yields widened 16 basis points to 438 basis points yesterday after reaching a euro-era record of 484 on Nov. 11.

It was another positive day on the Canadian preferred share market,with PerpetualDiscounts up 17bp, FixedResets up 2bp and DeemedRetractibles winning 9bp. Volume was average.

PerpetualDiscounts now yiel 5.59%, equivalent to 7.27% interest at the now standard equivalency factor of 1.3x. Long corporates now yield about 5.5% (OK, maybe a little bit less) so the pre-tax interest-equivalent spread is now about 180bp, not much different from the 175bp reported on March 9.