LONDON, Nov 8 (Reuters) – Greek Finance Minister George Papaconstantinou on Monday argued that his country was not suffering the same banking problems as Ireland. Speaking in London he also said that he expected the country’s deficit would be 5.5 percentage points lower by the end of the year. “Greece is not Ireland, it doesn’t have banking stability problems,” he said in a speech.
Well, I’d say Minister Lenihan could have said ‘We are not Greece, we don’t have a liquidity crisis… yet’… but then he won’t be really far from his usual rhetorical corner. For another Reuters story tonight showed that we are heading for a possible liquidity crunch:
“LONDON, Nov 8 (Reuters) – A widening in bid/offer spreads on Irish and Portuguese sovereign bonds this month is possibly an even bigger worry than the rising premium these bonds offer over German Bunds or widening credit default spreads.
Liquidity is the grease in the wheels of financial markets and if there is a reduction in liquidity then this will show up in the way prices move and in bid/offer spreads.
While the bid/offer spread on the Irish 10-year cash bond is not as wide as it was before the European Central Bank said in May it was prepared to buy government bonds in the secondary market, it has definitely broken higher.
Since the ECB’s May announcement, the bid/offer spread had largely stayed below 30 basis points. However, it has now widened to 40 basis points.
Ignoring such price action in its early stages can be risky since it could lead to a vicious spiral. This is what happened with Greek debt in March when a widening in bid/offer spreads was ignored, leading to a significant deterioration in the supply/demand dynamics.
Those holding long positions became increasingly keen to dump their holdings while those who might have potentially taken on new long positions refrained for fear of catching the proverbial falling knife.
What has been of concern over the last few sessions is that the widening in bid/offer spreads has also started to shift to the medium- to short-end of the yield curve.
There has even been an acceleration in the widening in the bid/offer spreads for two-year and five-year Irish sovereign debt.
This widening has continued even though the latest data shows the European Central Bank resumed its government bond buying programme after a three-week pause.
That suggests the ECB needs to step up its intervention beyond the 711 million euros it spent last week if it is to meet its aim of ensuring “depth and liquidity in those market segments which are dysfunctional”.
Unless there is a marked escalation in the ECB’s bond purchases, contagion-related risks suggest the potential for a further widening in Spanish yield spreads against Bunds. Against this backdrop, investors might prefer to focus on the relative value trade of a widening in the 10-year Spain/Italy yield spread.”