357 lines
13 KiB
Plaintext
Executable File
357 lines
13 KiB
Plaintext
Executable File
finance
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economics
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8372004
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-----
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# EU paralysis drives fresh bond rout
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## Political paralysis in Brussels and monetary tightening by the European
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Central Bank has set off a fresh spasm of the eurozone bond crisis, pushing
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spreads on Portuguese, Irish and Greek bonds to post-EMU records.
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![EU paralysis drives fresh bond rout ][1]
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There is no sign yet that Germany, Holland, and Finland will agree to expand
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the remit of the bail-out fund. Photo: AP
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[![Ambrose Evans-Pritchard][2]][3]
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By [Ambrose Evans-Pritchard][4], International Business Editor 8:21PM GMT 09
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Mar 2011
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[Comments][5]
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Portugal edged closer to the brink yesterday, having to pay almost 6pc to
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raise two-year debt. The yield on 10-year bonds briefly surged to 7.8pc after
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the Chinese rating agency Dagong downgraded the country's debt to BBB+.
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"These levels of interest rates are not sustainable over time," said Carlos
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Costa Pina, secretary of the Portuguese Treasury, blaming the latest upset on
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the lack of a coherent EU debt strategy rather any failing by Portugal to
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deliver on austerity.
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Mr Costa Pina rebuffed calls by leading economists in Portugal for an EU-IMF
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bail-out rather than drawing out the agony. "It is not justified. Portugal
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doesn't need external help, it needs urgent measures by the EU to restore
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market confidence."
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David Owen from Jefferies Fixed Income said last week's shock move by the ECB
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to pre-announce rate rises had tightened credit and effectively doomed the
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country. "The ECB by its actions has made it inevitable that Portugal will
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need a bail-out. There are parallels with the actions of the Bundesbank during
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the ERM crisis in 1992," he said.
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Mr Owen said the ECB is playing brinkmanship with EU leaders, pressuring them
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to come up with a grand solution to the debt crisis at summits this month. It
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is a dangerous game. "Spain is not yet safe. It has €2.5 trillion of combined
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household and company debt. That is an awful lot," he said
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## Related Articles
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* [Spain downgrade sparks storm over ratings][6]
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10 Mar 2011
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* [Moody's downgrades Spain][7]
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10 Mar 2011
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* [China swings to shock $7.3bn trade deficit][8]
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10 Mar 2011
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* [Flat-Earth ECB misreads oil spike again, and kicks Spain in the teeth][9]
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07 Mar 2011
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* [European Central Bank prepares rate rise as global tide turns][10]
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04 Mar 2011
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* [German-Irish brinkmanship raises EMU stakes][11]
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02 Mar 2011
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There is no sign yet that Germany, Holland, and Finland will agree to expand
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the remit of the bail-out fund (EFSF), letting it buy the bonds of debtor
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states pre-emptively, or lend to these countries so that they can buy back
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their own debt in a "soft-restructuring".
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If anything, the mood is hardening in Germany. The regional Lander have begun
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to demand a say over any EFSF deal. Hesse's justice minister Jorg-Uwe Hahn
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said he "categorically rejects" all moves to an EU 'Transferunion', debt pool,
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or fiscal fusion.
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The three blocs of Chancellor Angela Merkel's Bundestag coalition have written
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a paper instructing her to resist any concessions on a debt union. She has
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little leeway anyway since the long-awaited ruling of Germany's constitutional
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court on the legality of the EU rescue machinery hangs like a Sword of
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Damocles.
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"The EU will do too little, too late: the markets will dictate the solution,"
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said Louis Gargour from LNG Capital, speaking at a Euromoney bond forum. He
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said Greece is already in the grip of an unstoppable debt spiral, spending
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14.3pc of tax revenue on interest costs. He expects 50pc 'haircuts' on the
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debt, perhaps along the lines of the Brady Plan following Latin America's debt
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crisis.
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The Greek crisis is going to from bad to worse. Ten-year yields spiked to
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12.78pc yesterday and unemployment jumped sharply to 14.8pc in December, a
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reminder that the social trauma of austerity has yet to hit.
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Greece is undergoing the harshest fiscal squeeze ever tried by a modern
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Western economy, yet public debt will end above 150pc of GDP by 2013 even if
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it complies with EU-IMF terms. "We should default and return to the Drachma to
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punish foreign loan sharks who have bled us dry," said _Avriani_, a paper
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linked to the ruling PASOK party.
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There was similar anger in Ireland yesterday where Socialist MP Joe Higgins
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denounced "the poisonous cocktail of austerity concocted by the witchdoctors
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in Brussels and in Frankfurt".
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Premier Enda Kenny said Ireland was at "the darkest hour before the dawn." He
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has so far played down talk of a clash with Germany over the terms if
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Ireland's bail-out, but Irish politics may force him to default on senior bank
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debt if the EU refuses to yield.
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George Magnus from UBS said EU leaders are living in a "parallel universe",
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unable see that the festering EU debt crisis cannot be resolved without going
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to the root cause and recapitalising the banks.
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Peripheral EMU will remain trapped in deep slump without debt forgiveness but
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the EU cannot do this until lenders are strong enough to absorb the losses.
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"The sequencing of this has to start with the banks, otherwise there will be
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fears of another Lehman. The EU and IMF are in denial about everything we have
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learned over history."
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"The US banks raised $200bn of common equity in six weeks and that proved to
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be a turning point. If the EU does that, the crisis goes away," he said.
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Olli Rehn, the EU economics commissioner, has been pleading for a policy shift
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to lessen the burden on debt-stricken states, including a cut in the punitive
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interest cost imposed on Ireland.
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However, EU leaders have the final say on the terms of the rescue machinery,
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and they are answering to their own angry electorates. The eurozone remains a
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collection of sovereign states. That is the nub of the matter.
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[Tweet][16]
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fresh-bond-rout.html
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Telegraph
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## [Economics][17]
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* ### [Europe »][18]
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* ### [Finance »][19]
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* ### [Ambrose Evans-Pritchard »][3]
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* ### [Business Latest News »][20]
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* ### [Currency »][21]
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In finance
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[![Riot police use tear gas as protesters throw petrol bombs in Athens][22]
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][23]
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### [Tear gas and petrol bombs][23]
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[![IMF Global Financial Stability Report: the key points][24] ][25]
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### [IMF Stability Report: key points][25]
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[![Indebtedness and Leverage in Selected Advanced Economies (as a percent of
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2010 GDP) ][26] ][27]
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### [Threats to world economy: in charts][27]
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[![Monetary Policy Committee members: the hawks, the doves and the in-
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betweeners][28] ][29]
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### [Interest rate split: how they voted][29]
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[![][30] ][31]
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### [Top 10 economics stories of 2010][31]
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[X][12] Share & bookmark
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[What are these?][13]
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Share:
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* [ ][12]
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* [ ][14]
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* [ ][15]
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* [Tweet][16]
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* Advertisement
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![][32]
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telegraphuk
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Please enable JavaScript to view the [comments powered by Disqus.][33] [blog
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comments powered by Disqus][34]
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[Market Data »][35]
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sponsored features
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on former IMF chief][44]
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