Archive for the ‘Debt’ Category

Greece Debt Deal Seconds Away (Or Hours,Days,Weeks Away)

Wednesday, February 1st, 2012

Markets are in euphoria as stocks held onto their gains for the first trading day of February. This is extending the impressive rally in January, following a handful of positive economic news from Europe and China in addition to news that Greece and its private creditors may only be hours away from a deal. BUT, several hours later, we are still waiting for the 70% haircut “really slice” of Greece’s forgiven debt  burden. On Tuesday, the S&P triggered a “golden cross,” meaning its 50-day moving average rose above its 200-day average. That is seen as the signal of an uptrend, but some analysts see it more as a psychological positive, confirming a move, rather than as a major signal.

For the month of January, the Dow rallied 3.4 percent, the S&P 500 jumped 4.36 percent, and the NASDAQ surged 8.01 percent. All three major indexes posted their best month since last October, while the Dow and S&P logged their best January since 1997.

US and World Economic Data

The pace of growth in the U.S. manufacturing sector rose to 54.1 in January, to its highest level since June, according to the Institute for Supply Management. Economists had expected a reading of 54.4, according to a Reuters poll. Still, a reading above 50 indicates an expansion of the U.S. manufacturing sector. Construction spending gained 1.5 percent in December, logging its fifth consecutive monthly gain, according to the Commerce Department.

China’s factory sector expanded in January, supporting hopes the world’s second-biggest economy will avoid a hard landing.

Greece Debt Deal

Greek Finance Minister Evangelos Venizelos said talks between Athens and its private creditors were “one formal step away” from a deal needed to avoid a messy default. Greece is locked in two sets of talks— one with private creditors to have them take losses on their bondholdings and the other with its international bailout rescuers to receive new loans. 

“We are at a crucial point in developments. In the coming days, the agreements must be completed” for the bond swap and a second €130 billion ($171 billion) bailout package, government spokesman Pantelis Kapsis said. Debt inspectors from the European Commission, European Central Bank and the International Monetary Fund, known as the troika, are in Athens for talks on the second rescue package, which is tied to an agreement with private creditors to accept losses on Greek bonds they hold. The success of the bond deal, however, also depends on the outcome of the bailout talks.

The bond swap, known as the Private Sector Involvement, or PSI, will see private creditors swap the bonds they hold with new ones worth half their original face value, longer repayment times and lower interest rates. They will also get a €30 billion cash sweetener — to be taken from the €130 billion bailout — for accepting the deal. Once secured, the PSI will cut €100 billion off Greece’s national debt.

Overall, the investors participating in the deal will face a loss on their bondholdings of more than 70 percent, Finance Minister Evangelos Venizelos said in a Parliament committee meeting Tuesday night. The official offering of the new bonds will come by Feb. 13, Venizelos said. Greece is running out of time, as it faces a €14.5 billion bond redemption on March 20 that it cannot afford to pay without additional help. A default would spell disaster for the country and destabilize European and global markets.

Both deals will need the agreement of the heads of the three political parties in Greece’s interim coalition, Kapsis said, and Prime Minister Lucas Papademos was to call the party heads to a meeting to sign off on them and required austerity measures. Chief IMF inspector Poul Thomsen also said a deal was close, but pressed the recession-plagued country to lower employment costs and even slash the minimum wage to make the economy more competitive.

On the contrary the European Central Bank is likely to refuse to show its hand on how it will help cut Greece’s debt burden until private investors and the government have agreed to a deal. While Greece’s creditors are increasing pressure on the ECB to join the bond swap being negotiated with the country, central bankers have remained silent on their intentions. Economists say the ECB wants to see the private-sector agreement concluded before indicating its strategy, which may include forgoing profits from its Greek bonds or a transfer to one of the region’s rescue funds.

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Result Of The EU Summit; Housing Prices Dip Again

Tuesday, January 31st, 2012

Meeting in Brussels, on Monday, European Union leaders agreed to implement the European Stability Mechanism, a permanent rescue fund, in July. The first summit of the year ended without new solutions for the debt crisis in Greece. Without a deal with private-sector creditors, the country jeopardizes its access to bailout funds, and might not be able to make a €14 billion debt payment that’s due March 20. The €500 billion ESM was originally set to enter into force next year, when a temporary bailout fund expires.  The leaders of all but two members of the 27-nation EU also agreed to sign a fiscal pact, which was designed to prevent governments from running excessive deficits and racking up unsustainable debts. U.S. stocks recovered most of their lost ground Monday afternoon, but struggled to pull out of the red as concerns over Greece continued to weigh on the market. Stocks initially opened higher amid renewed hopes for a Greek deal and after the approval of a new euro zone budget discipline pact. Stocks then erased their early gains Tuesday following a handful of weaker-than-expected earnings and economic news.

However, gains were limited by the mounting tension surrounding Portugal’s debt woes, with the nation’s two-year bond yields hitting a euro-era record above 21 percent. Meanwhile, Standard & Poor’s warned it may downgrade “a number of highly rated” G20 nations from 2015 if their governments fail to enact reforms to curb rising health care spending. Concerns over the size of United States debt reared their head once again as ratings agency Standard & Poor’s warned that health care costs for a number of highly-rated Group of 20 countries, including the U.S., could hurt growth prospects and harm their sovereign creditworthiness from the middle of this decade.

“Governments’ fiscal burdens will increase significantly over the coming decade, with the highest deterioration in public finances likely to occur in Europe and other advanced G-20 economies, such as Japan and the U.S.,” S&P said in a statement on Tuesday. Health care costs for a typical advanced economy will stand at 11.1 percent of gross domestic product by 2050, up from 6.3 percent of GDP in 2010, S&P said. Population aging will lead to profound changes in economic growth prospects for countries around the world as governments work to build budgets to face ever greater age-related spending needs.

Housing Doldrums Remain

On the economic front, home prices fell 1.3 percent last November, according to S&P/Case-Shiller’s 20-city composite index, adding to the 0.7 percent drop seen in October. Economists had expected a decline of 0.5 percent. On a seasonally adjusted basis, 17 out of 20 cities racked up monthly declines and average national home prices were around levels seen in mid-2003. Prices in the 20 cities also steepened their year-over-year decline, falling 3.7 percent compared to a 3.4 percent decline in October. Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall.

Recent data has lead to optimism the housing sector is in the early stages of the healing process, with some economists looking for prices to find a bottom this year. Still, the recovery is expected to be a lengthy one as the market remains hampered by an excess amount of homes for sale in the midst of weak demand.

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US Futures Drop After GDP; 2012 Growth Caution

Friday, January 27th, 2012

The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but a strong rebuilding of stocks by businesses and weak spending on capital goods hinted at slower growth in early 2012. U.S. stock index futures retreated Friday, erasing their early gains after the report. U.S. GDP expanded at a 2.8 percent annual rate in the fourth quarter, but the figure was still slightly below expectations for a 3.0 percent gain. An to continue to rumorville, European stocks were earlier buoyed by comments made by European economic affairs chief Ollie Rehn who said a deal on reducing Greece’s private sector debt is imminent and should be completed by the end of January at the latest.

Growth in the fourth quarter got a temporary boost from the rebuilding of business inventories, which was the fastest since the third quarter of 2010, after they declined in the third-quarter for the first time since late 2009. Inventories increased $56.0 billion, adding 1.94 percentage points to GDP growth. Excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period’s 3.2 percent pace. Consumer spending, which accounts for about 70 percent of U.S. economic activity, stepped to a 2 percent rate from the third-quarter’s 1.7 percent pace – largely driven by pent-up demand for motor vehicles. The robust stock accumulation suggest the recovery will lose a step in early 2012. Also pointing to slower growth, business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll. Expectations of soft growth led the Federal Reserve on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014. Fed Chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2 percent to 2.7 percent range, was mulling further asset purchases to speed up the recovery. The Fed warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard. The Fed is attempting to shield the economy from a potentially more severe recession in Europe. 

About 23.7 million Americans are either out of work or underemployed. The shrinking labor force suggests the economy’s long-term growth potential has slipped below 2.5 percent. A sustained growth pace of at least 3 percent would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work.

Treasury Remarks

Treasury Secretary Timothy Geithner told the World Economic Forum in Davos the U.S. economy still faced big challenges. “We’re still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States”

U.S. Treasury Secretary Timothy Geithner hinted Friday that the Obama administration could support an increase in resources for the International Monetary Fund to fight the euro crisis, and also sounded a note of cautious optimism on the U.S. economy. The U.S. could support an increase in IMF resources, but only if Europe puts more of its own money on the line first, he said in a public question-and-answer session at the World Economic Forum in Davos, Switzerland. Mr. Geithner said he could envision the IMF doing more to support European efforts to contain its debt crisis, “but it cannot substitute” for a lack of commitment from Europe. He said that European governments themselves accept this fact. The IMF is seeking as much as $500 billion in new money for loans in coming years to countries that run into trouble paying their bills or to ease concerns about volatility in the bond markets. Already the IMF is contributing to bailouts for Greece, Ireland and Portugal.

Week of January 30th

MONDAY: Personal income & spending, Dallas Fed mfg survey
TUESDAY: Employment cost index, S&P Case-Shiller home price index, Chicago PMI, consumer confidence, Florida GOP Primary vote; Earnings from ExxonMobil, Eli Lilly, Pfizer, UPS, Amazon.com, Broadcom
WEDNESDAY: Weekly mortgage applications, Challenger job-cut report, ADP employment report, Fed’s Plosser speaks, ISM mfg index, construction spending, oil inventories, auto sales; Earnings from Aetna, Marathon Oil, Qualcomm, Electronic Arts
THURSDAY: Jobless claims, productivity and costs, Fed’s Fisher speaks, chain-store sales; Earnings from AstraZeneca, Deutsche Bank, Merck, Royal Dutch Shell, Sony, Unilever, beazer Homes
FRIDAY: Employment situation, factory orders, ISM non-mfg index; Earnings from Clorox

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Fed Targets Inflation At 2%

Thursday, January 26th, 2012

The Fed yesterday said it plans to keep interest rates low through at least late 2014 and Chairman Ben Bernanke said policy makers are considering more bond purchases to boost growth. U.S. equities turned lower after new home-sales unexpectedly decreased, erasing gains triggered after earnings and orders for durable goods topped forecasts and initial jobless claims remained below 400,000. A third, fourth and fifth round of easing “lie ahead,” Bill Gross, wrote in his Twitter post. Talks on a debt swap to avert a Greek default resume today. Stocks reversed early gains that sent the Dow Jones Industrial Average to the highest level since 2008.

Ten-year Treasury yields slipped five basis points to 1.95 percent at 11:07 a.m. in New York after decreasing the most in two weeks yesterday. Nickel, wheat and copper climbed at least 1.9 percent to lead gains. Treasuries and commodities rose for a second day after the Federal Reserve yesterday pledged to keep interest rates low and said it is considering more bond purchases.

Weekly jobless claims gained 21,000 last week to a seasonally adjusted 377,000, according to the Labor Department. Still, despite the increase, the figure still held below the 400,000 mark and the underlying trend continued to point to improving employment conditions. Economists had forecast claims rising to 370,000. New home sales posted a surprising drop of 2.2 percent in December for the first time in four months to a seasonally adjusted 307,000. Durable goods orders increased 3 percent in December, the second straight monthly gain, according to the Commerce Department. And leading indicators increased 0.4 percent to 94.3, rising to a five-month high in December, according to the Conference Board, pointing to continued momentum in the recovery. Economists had expected the index to increase 0.7.

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Portugal May Be Next On Debt Restructuring

Tuesday, January 24th, 2012

This morning the Portuguese 5 Year Credit Default Swaps (CDS) rates touched an all time high 1250 basis points or 12.5%. Yes it’s true, they are not borrowing from the public markets therefore are not affected by high rates since bailout, early summer of 2011. However bond vigilantes are demanding higher rate of returns which may signify a 70% risk of default. Yet, the dilemma on Greece’s debt restructuring has still not panned out. To add to the doldrums, this morning Standard & Poor’s announced that it will likely downgrade Greece’s ratings to “selective default” when the country concludes its debt restructuring. Athens is desperate for a deal within days to ensure funds from a 130 billion euro rescue plan drawn up by European partners and the International Monetary Fund arrive before 14.5 billion euros bond redemption’s fall due in March.

Greece was clinging on Tuesday to hope of a last-minute bond swap deal to avoid a messy default after euro zone officials sent talks back to square one by rejecting a final offer from the country’s private bondholders. After weeks of haggling with creditors in Athens, euro zone finance ministers in Brussels on Monday dealt a sharp setback to those hopes by rejecting creditors’ demand for a 4 percent coupon, or interest rate, on new, longer-dated bonds in exchange for existing debt. Private sector creditors now have the upper hand in deciding whether Athens will be forced into a hard default that could sow chaos across the global financial system (credit event) and push other weak euro zone members closer to a default.

A “voluntary” swap where both sides agree to the terms of the deal is required to prevent insurance against a Greek debt default from being paid out. The bond swap is meant to cut 100 billion euros from Greece’s debt burden of over 350 billion, in a bid to ultimately slash its debt from around 160 percent of GDP to a more manageable 120 percent of GDP by 2020.

Read previous post of Portugal issues here.

To see the Macro Economic effects to US markets see this video on Portuguese 5 Yr CDS Rates

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Greek Debt Deal Still Not Done

Monday, January 23rd, 2012

European leaders ratcheted up the pressure Monday on Greek bondholders to take voluntary losses to ease the region’s debt crisis. Talk that Europe has no intention to give more money to Greece may be contributing to stock declines on Monday. Finance ministers were meeting, Greece had been presented with a “maximum offer” by its private bondholders, was also in play. The message from Euro finance ministers to the Greek officials implying they should not expect an increased bailout above the current planned amount could be a reason. A deal was to be hashed over the weekend but that quickly faded into Satuarday night. Perhaps the ground work is being laid out for a possible Greek default. Or investors are looking past Greece and looking towards Portugal who made need a similar debt restructure. It’s not clear how Europe is going to deal with both its debt and growth issues. We are likely to get a good announcement from the negotiations between the Greek government and the steering committee of the (Institute of International Finance).

How the Greek restructuring is handled — whether it will be treated as an outright default, which would trigger insurance policies known as credit default swaps against the debt, or if it will be regarded as voluntary and thus not a credit event that would cause CDS payoffs.

Christine Legarde, managing director of the International Monetary Fund, earlier in the morning told CNBC that the IMF will need a total of $500 billion, or another $350 billion, for its liquidity fund. The International Monetary Fund (IMF) turned the focus on governments, urging them to complete action on a new bailout fund. Patience among leaders may be wearing thin as bondholders and Greek officials wrangle over the interest rate for new bonds that would be part of a deal reducing Greek debt by around €100 billion, or $130 billion.

Private sector bondholders are seeking yields of nearly 4 percent, but Greece, as well as Germany and the I.M.F., argue that a yield closer to 3 percent is necessary to give the restructuring a serious hope of success. With the talks at an impasse, the pressure is now mounting on finance ministers to push for a solution. At stake is the need to pare Greek debt to levels where the country can conclude a bailout with the European Union and the I.M.F. that would give it the cash it needs to repay loans coming due in March and, officials hope, allow Athens to finance its needs through 2013. Without such a package, Greece could be faced with a chaotic default that further destabilizes the rest of the euro zone. Reinforcing the need for a deal, Mrs. Merkel said she wanted agreement “soon enough that no new bridge loan whatsoever will be needed” for Greece.

 The I.M.F. pressed European governments to bolster the bailout funds available for euro zone countries so that the region’s problems can be contained. “We need a larger fire wall,” Christine Lagarde, managing director of the International Monetary Fund, said at a conference in Berlin. Governments should add “substantial real resources to what is currently available,” she said. She suggested that the €440 billion European Financial Stability Facility, a temporary bailout fund established in 2010, could be rolled into a €500 billion permanent fund, the European Stability Mechanism, that officials hope to introduce by the middle of this year.

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Greece Close To A Debt Cut Deal

Friday, January 20th, 2012

Greece and its private creditors on Friday were nearing an agreement on a deal to write down 50%-70% of the face value of the country’s debt by swapping existing bonds for new bonds with longer maturities and lower interest rates. Last weeks talks broke down, so we have yet to see the details on paper. What rate is chosen could determine how much of a loss creditors will take on the current value of their Greek debt holdings. Participants in the talks say discussions are continuing and the exact details could change. Technically, this is considered a restructured debt reorganization dubbed during the process of bankruptcy. Portugal clinched a deal on ambitious labour market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear. Portugal is the next potential candidate to default in the euro zone after Greece — a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks.

A deal between Greece and private-sector creditors has been identified as a prerequisite for progress by the European Union and the International Monetary Fund to make their contributions to a second bailout package for Greece totaling €130 billion ($168.6billion). Greece and representatives of bondholders, predominantly banks and hedge funds, were closing in a coupon that would begin at 3.5% on new bonds with shorter maturities and rising to a cap of 4.6% on longer-dated bonds. The new bonds will carry maturities of up to 30 years, with a grace period on repayment of principal debt of up to 10 years under discussion.

Creditors would be writing down 50% of the face value of the bonds, but in terms of net present value over the course of the maturities represents a loss for bondholders of between 65% to 70%, said a participant in the talks. The goal is to slice €100 billion off Greece’s total €360 billion stock of debt—saving Greece some €4 billion a year in interest payments. The amount of public support for Greece will depend on how much of a reduction the private sector makes in the country’s overall debt.

There is pressure on the government to make up for missed deficit targets last year, as well as to detail some €12.5 billion in further fiscal cuts to narrow Greece’s budget deficit over the next four years which will further bring deep recessions.

Portugal

Portugal clinched a deal on ambitious labour market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear. Portugal is the next potential candidate to default in the euro zone after Greece — a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks. 

The concerns were clearly borne out this week as Portugal’s bond yields rose virtually without interruption, to all-time highs, despite the issuance of 2.5 billion euros of short-term treasury bills on Wednesday at slightly lower yields. The country’s 10-year yields rose to almost 15 percent on Thursday and hovered around 14.80 percent on Friday. Five-year credit default swap prices implied the market was pricing in a 66.8 percent chance of a Portuguese default. The sharp rise in bond yields was partially triggered by Standard & Poor’s downgrades of European countries last week, which left Portugal as the second euro zone country to be rated “junk” by all the main rating agencies, along with Greece.

Portugal was the only country really rattled by the downgrade because it is seen as a much more complicated case. It combines the same high level of private sector overindebtedness as Spain, high public sector debt similar to Italy, plus the economic recession. 

The key problem for Portugal, which was the third euro zone country to seek a bailout after Greece and Ireland, is whether it has enough time to restructure its economy to grow as it enacts harsh austerity and faces the worst recession in decades. This year will be the toughest of the three-year bailout as deep spending cuts, including the elimination of two months of pay for civil servants and across-the-board tax hikes, spark a 3 percent economic contraction after a 1.6 percent slump in 2011. The most probable outcome is Portugal asking for longer terms or more bailout money, just as Greece has done. Portugal has to return to the long-term bond market in the second half of 2013, which many analysts see as at least hard to achieve. Problem relates to its high level of debt, currently around 100 percent of gross domestic product, combined with low growth.

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IMF Is Raising Funds to $1 Trillion

Wednesday, January 18th, 2012

The International Monetary Fund is proposing to raise its lending capacity by as much as $500 billion to insulate the global economy against any worsening of Europe’s debt crisis. The Washington-based lender is aiming to increase its resources after identifying a potential need for $1 trillion in financing in coming years, an IMF spokesman said in a statement. A US Treasury official stated they have “no intention’ of providing additional money to the International Monetary Fund. The Treasury spokesperson said that Europe has the capacity to solve its own problems and the IMF cannot substitute for a robust euro-area firewall. This new rallied stocks around the world.

That news echoed media reports last December, which said that the IMF was planning to put together $600 billion to lend to troubled euro zone states, but the financial institution denied the reports. In November, a report in Italian newspaper La Stampa which said that the IMF was preparing an aid package worth up to 600 billion euros ($798 billion) for Italy boosted European stocks, but was quickly denied by officials from the Fund. The additional funding needs will be discussed at the G20 meeting in Mexico City in February, the source said.

IMF Managing Director Christine Lagarde said yesterday her staff is looking at ways to expand the fund’s war-chest, which currently has about $385 billion available. While euro-region nations have already pledged to contribute 150 billion euros ($192 billion), the U.S. has said it has no plans to make new bilateral loans and leaders of Group of 20 nations ended last year at odds over the issue. “The biggest challenge is to respond to the crisis in an adequate manner and many executive directors stressed the necessity and urgency of collective efforts to contain the debt crisis in the euro area and protect economies around the world,” Lagarde said yesterday in an e-mailed statement.

The IMF is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the top contributors, according to a G-20 official, who spoke on condition of anonymity because the talks are private. The fund wants a deal struck at the Feb. 25- 26 meeting of G-20 finance ministers and central bankers in Mexico City, the official said. The push for more money by the IMF may extend this month’s rally in investor sentiment toward European debt markets on speculation the region is enjoying a respite from its two-year debt turmoil and that any euro-area recession may be shallow.

In a sign the crisis may have longer to run, the World Bank cut its global growth forecast yesterday by the most in three years to 2.5 percent this year and said the euro area may contract 0.3 percent. Euro-area countries also need to repay 157 billion euros of maturing debt this quarter.

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S&P Touches 1330; China GDP Rallies World

Tuesday, January 17th, 2012

U.S. stocks advanced after better-than-expected economic data in the U.S. & China fueled optimism over the pace of global economic growth and helped investors shrug off a slate of European ratings downgrades late last week. The DJIA climbed 114 points, or 0.9%, to 12538. The S&P 500 advanced 12 points, or 0.9%, to 1300. Before the open of trading, the Federal Reserve Bank of New York’s Empire State Manufacturing Survey well outstripped expectations. The business-conditions index rose to 13.48 this month from a revised 8.19 in December. Economists had expected a reading of 11. China’s economy grew at its weakest pace in 2-1/2 years in the latest quarter, but slightly stronger than the 8.7 percent that economists had predicted.

China Economy Slowing

China’s economy grew at its weakest pace in 2-1/2 years in the latest quarter and it appeared headed for an even sharper slowdown in the coming months as export demand fades and the housing market falters. The fourth-quarter year-on-year growth of 8.9 percent, although slightly stronger than the 8.7 percent that economists had predicted, may give Beijing yet another reason to gently ease monetary policy, most likely by reducing the amount of reserves that large banks must hold. The data released on Tuesday may not satisfy investors, who were looking for figures that were either weak enough to provide a clear-cut case for policy easing or strong enough to allay fears that the world’s second-biggest economy might unravel.

Economists widely expect China’s 2012 growth will be the weakest in a decade, a more pronounced slowdown would put a major drag on already shaky global growth. Ma Jiantang, the head of China’s statistics agency, said China’s growth was likely to slow further as Beijing tries to restructure the economy away from exports and towards domestic consumption, something the United States and other trading partners have long pressed China to do.

ECB Overnight Deposits

Commercial banks parked over half a trillion euros at the European Central Bank, the highest on record, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it. Overnight deposits at the ECB have been hitting new records even since last month’s first ever offering of three-year loans from the ECB pumped 490 billion euros ($620 billion) into the banking system. ECB data on Tuesday showed deposits topped the half a trillion mark for the first time ever, as banks parked a staggering 502 billion euros, up from the 493 billion euros the previous day.

It is likely to mark at least a temporary peak in the level of hoarding. The end of the ECB’s monthly reserves cycle – the point when banks have fulfilled their ECB targets and have few options to juggle their funding – ends on Tuesday. Deposits traditionally drop when the new reserves cycle begins and banks have more funding freedom. Changes to the ECB’s reserves rules, which will mean banks have to keep less of a cash buffer at the ECB, will also kick in on Wednesday. The move will cut banks’ reserves ratio requirements to 1 percent from 2 percent and is set to save banks 100 billion euros according to the ECB.

Spain Debt Auction

Spain’s first test of investor appetite for its debt since a two-notch ratings downgrade, selling 4.88 billion euros ($6.2 billion) of treasury bills ahead of a far trickier hurdle later this week. The Treasury had aimed to raise between 4 and 5 billion euros from the sale, a prelude to what has been dubbed a “litmus test” auction on Thursday of bonds with maturities of up to 10 years. Yields on the 12- and 18-month paper were 2.049 percent and 2.399 percent respectively, slightly lower than expected and little more than half of what was paid to place the same maturities in December.

This Thursday Spain will look to place 3.5-4.5 billion euros of paper due in 2016, 2019 and 2022, the latter two maturities well beyond the duration of the ECB loans. Prior to Tuesday’s bill auction, analysts said they expected the ten-year auction yield at around 5.5 percent. The last time Spain sold 10-year paper was on Dec 15, when it paid 5.545 percent. The 10-year bond traded at 5.14 percent, slightly lower on the day.

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