I’d say things in Europe are heading for a crescendo … or should I say cascade?:
Mr. Honohan’s comments, and worries that Ireland’s hugely overextended lenders face nationalization or the butcher’s block, sent shares in Bank of Ireland and Allied Irish tumbling by 20 per cent on Tuesday. Depositors have been fleeing Irish banks since the beginning of the year, with Allied Irish losing €13-billion ($21-billion).
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But the focus of market anxiety is moving from Dublin to other European capitals, especially Lisbon and Madrid, where banks shares were under pressure Tuesday amid refinancing fears.
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Instead of sparking a relief rally in the euro zone bond markets, the €80-billion to €90-billion rescue package for Ireland triggered alarm bells – and a jump in the risk premium that a bondholder pays for insuring Irish, Greek, Portuguese and Spanish bonds. The yields on these bonds continued to rise on Tuesday, exacerbating the feverish market mood.
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The problem is a rolling tide of debt maturities on the horizon. Each wave is bigger than the last and the European Union’s ability to surf this breaker is looking doubtful.Consider Greece. According to London brokerage Evolution Securities, Greece needs to repay €28-billion in rescue loans in 2014. But under the new German-inspired rules, any new bond Greece issues must contain a clause about debt restructuring, implying that bondholders will take a haircut in the event of default. As Evolution’s Gary Jenkins put it: “Who will lend to Greece €28-billion in 2014 on subordinated terms?”
But Ireland’s teetering government has proposed a budget:
Ireland’s government said it will cut spending by about 20 percent and raise taxes over the next four years as talks on a bailout of the country near conclusion.
Welfare cuts of 2.8 billion euros ($3.8 billion) and income tax increases of 1.9 billion euros are among the steps planned to narrow the budget deficit to 3 percent of gross domestic product by the end of 2014. The shortfall will be 12 percent of GDP this year, or 32 percent including a banking rescue.
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Irish bonds fell today after the country’s credit rating was downgraded yesterday two levels by Standard & Poor’s on estimates the cost of bailing out its banks will escalate.The decline push the yield on the country’s 10-year debt up 52 basis points to 9.17 percent. The premium investors charge to hold the debt over German bunds, Europe’s benchmark, widened by 33 basis points to 619 basis points. The premium reached a record 652 basis points on Nov. 11.
The premium on Spanish 10-year bonds over bunds climbed to a euro-era record today.
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Finance Minister Brian Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments such as Austria. Hewlett-Packard Co., the world’s largest computer maker, said this week it may reconsider its investment in Ireland should the country raise its company tax rate as part of an aid accord.
DBRS has downgraded some Anglo Irish Bank sub debt:
Today’s downgrade follows the execution of the Bank’s note exchange offer. The default status for the exchanged and now-extinguished 2017 Notes reflects DBRS’s view that bondholders were offered limited options, which, as discussed in DBRS’s press release dated 25 October 2010, is considered a default per DBRS policy.
The exchange offer was coercive and Orwellian:
Ireland faces a bill of more than 50 billion euros to prop up its banks and is seeking to ensure the losses of lenders it owns outright are shared with subordinated noteholders. Finance Minister Brian Lenihan has said he will legislate to allow the government to impose penalties on subordinated creditors while making senior investors whole.
Nationalised lender Anglo Irish Bank cleared the first major hurdle in its closely watched debt restructuring when a group of subordinated creditors agreed to take an 80 percent write-down on the value of their holdings.
Hear that whistling noise? That was 300 years of bankruptcy law being thrown out the window. It really gives you confidence that Europe will work out its problems in a rational, predictable and legal manner, eh? Maybe tomorrow I’ll rush out and make a great big investment, one that’s backed by the full faith and credit of the Irish government. Or maybe not.
The Canadian preferred share market enjoyed a bit of a bounce today, as volume came off its recent very high levels, but remained above average. PerpetualDiscounts gained 12bp and FixedResets were up 3bp.
PerpetualDiscounts now yield 5.36%, equivalent to 7.50% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 210bp, a significant tightening from the 220bp reported on November 17 … although mind you, it was also 210bp on November 10, when the relevant yields were 5.28%, 7.39% and 5.3%.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2006 % | 2,257.0 |
| FixedFloater | 4.89 % | 3.54 % | 27,074 | 19.06 | 1 | -1.0245 % | 3,436.9 |
| Floater | 2.64 % | 2.35 % | 57,631 | 21.36 | 4 | -0.2006 % | 2,437.0 |
| OpRet | 4.76 % | 3.03 % | 60,321 | 2.42 | 8 | -0.0952 % | 2,391.3 |
| SplitShare | 5.41 % | 0.04 % | 120,271 | 1.04 | 3 | -0.0463 % | 2,486.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0952 % | 2,186.6 |
| Perpetual-Premium | 5.67 % | 5.29 % | 160,629 | 5.42 | 24 | 0.0753 % | 2,013.2 |
| Perpetual-Discount | 5.35 % | 5.36 % | 269,788 | 14.91 | 53 | 0.1208 % | 2,044.1 |
| FixedReset | 5.21 % | 3.13 % | 354,687 | 3.17 | 51 | 0.0332 % | 2,279.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.D | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.10 Bid-YTW : 4.02 % |
| IGM.PR.B | Perpetual-Discount | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 24.74 Evaluated at bid price : 24.96 Bid-YTW : 5.97 % |
| HSB.PR.C | Perpetual-Discount | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 23.37 Evaluated at bid price : 23.62 Bid-YTW : 5.48 % |
| BAM.PR.G | FixedFloater | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 25.00 Evaluated at bid price : 22.22 Bid-YTW : 3.54 % |
| IAG.PR.A | Perpetual-Discount | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 5.34 % |
| IAG.PR.C | FixedReset | 1.56 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.39 Bid-YTW : 2.81 % |
| IAG.PR.E | Perpetual-Premium | 1.62 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.09 Bid-YTW : 5.89 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.T | FixedReset | 105,491 | RBC crossed 50,000 at 27.85; TD crossed the same number at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 27.77 Bid-YTW : 3.19 % |
| RY.PR.B | Perpetual-Discount | 78,410 | Nesbitt crossed 40,800 at 23.45; National crossed 20,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 23.19 Evaluated at bid price : 23.40 Bid-YTW : 5.04 % |
| RY.PR.I | FixedReset | 78,367 | Scotia crossed 66,700 at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 3.18 % |
| BNS.PR.R | FixedReset | 74,145 | RBC crossed 45,000 at 26.60; Nesbitt crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-25 Maturity Price : 25.00 Evaluated at bid price : 26.45 Bid-YTW : 3.19 % |
| BNS.PR.L | Perpetual-Discount | 62,060 | RBC crossed 47,200 at 22.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-24 Maturity Price : 22.49 Evaluated at bid price : 22.64 Bid-YTW : 5.01 % |
| BMO.PR.H | Perpetual-Discount | 58,625 | Nesbitt crossed 50,000 at 25.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-03-27 Maturity Price : 25.00 Evaluated at bid price : 25.30 Bid-YTW : 4.77 % |
| There were 34 other index-included issues trading in excess of 10,000 shares. | |||