Libor Show Doubts on EU Trillion Dollar Bailout Package

May 12, 2010 by · Leave a Comment
Filed under: Global News 

It has been really surprising with the size of the Euro support package that is reported at being $1 trillion dollars is not calming the markets and sovereign debt investors.  All the experts do not think this will be enough to cure the debt issue.

Most experts still think that countries like Greece, Portugal and Spain will need to restructure their debt and that means that a haircut will be taken on some of these bond issues.  If a trillion dollars does not help, then we are at a point that we might actually be on the last legs on a bear market rally and we are in for some serious declines to create a real support.  The only other option is that we are in for some serious inflation.

The LIBOR (London Inter-bank Lending Rate) is edging up with all this uncertainty.  It will be important to watch over the next 2-4 weeks if the rate rises and gets closer to the rates we saw last March.

Bloomberg – Money markets and the cost of protecting bank bonds from losses show investors are concerned Europe’s almost $1 trillion rescue plan may not be enough to contain the region’s sovereign debt crisis.

The Markit iTraxx Financial Index of credit-default swaps on European banks and insurers rose to 38 basis points more than the Markit iTraxx Europe Index tied to investment-grade companies from 31 yesterday. While the gap narrowed from 58 basis points before European leaders agreed to the rescue plan, the bank index on average has traded 10 basis points less the past three years. A measure of banks’ reluctance to lend also rose to more than three times the level from March.

The loan package for debt-laden nations including Greece is part of an attempt to stop a decline in the euro and stave off a sovereign default that would threaten recovery from the worst global recession since the 1930s. European financial companies, which hold more than 134 billion euros ($170 billion) in Greek, Portuguese and Spanish sovereign debt, are under scrutiny by investors concerned that they’re owed too much by Europe’s most- indebted countries.

“Sovereign risk hasn’t gone away in the slightest,” said Jim Reid, head of fundamental strategy in London for Deutsche Bank AG, Germany’s biggest bank. “What this package has done is massively reduce the tail risk in European markets without necessarily changing the medium- to long-term dynamics of financial markets.”

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