Credit risk diverges across eurozone
By David Oakley in London
Published: July 21 2008 03:00 | Last updated: July 21 2008 03:00
Investor fears for the credit risk of eurozone countries with weaker economies has increased sharply this month.
Prices of credit default swaps - a kind of insurance against bond defaults and the best gauge of risk in the debt markets - for Greece, Italy, Spain, Portugal and Ireland have all jumped.
In contrast, German and French CDS prices have been relatively steady on views that the eurozone's two biggest economies will hold up better in a tougher climate. CDS prices for the UK, which is outside the eurozone, have been steady in spite of fears for the country's housing market.
Greek, Italian, Spanish, Portuguese and Irish 10-year bond yields have also widened sharply against Germany in the past month.
Thomas Mayer, chief European economist at Deutsche Bank, said: "For a long time the economic environment was benign, but the party has now come to an end for the eurozone and particularly the peripheral economies, such as Italy and Greece."
Bankers say tensions could rise over the direction of monetary policy because it is difficult to set one interest rate for 15 countries with economies that are diverging in terms of growth, public finances and credit worthiness.
For example, consensus forecasts estimate Italian growth this year will be 0.4 per cent compared with a growth rate in Germany of 2.2 per cent. Spain and Ireland are also more exposed to the threat of recession because of the collapse in property prices, while Greece and Portugal have large current account deficits.
Meyrick Chapman, a fixed income strategist at UBS, said: "The probability of recession is not equal across the eurozone. Germany is in much better shape than countries, such as Italy, Spain, Ireland and Greece, and can probably better weather the problems. German CDS prices are likely to continue to perform better than other eurozone -countries."
CDS prices have risen since June 5, when Jean-Claude Trichet, European Central Bank president, stepped up warnings on inflation. Since then, the cost to insure German debt against default has risen by €1,000 to €6,000 for €10m of debt. In contrast, the cost to insure Greek debt has risen €16,000 to €51,000. It has risen €15,000 for Italy, €14,000 for Portugal, €13,000 for Spain and €10,000 for Ireland.
Wolfgang Münchau, Page 9
