So, Will We See QE3 In 2011?

The turmoil in the market for sovereign bond is now clearly spilling over to the corporate sector, and particularly into the financial industry. The banks perceived by investors as the weakest, are getting their insurance premiums kicked up by a substantial amount of bp’s, that in turn raises the banks funding costs, and not every bank in Europe has a wealthy tipple-A government to back them up. According to the German Die Welt Online is the EU commission ready to double the EUR750 billion bailout fund that was established earlier this year. I think I see the QE3 on the horizon.

“This topic is one to watch over the coming days.”

Gavan Nolan


Given the recent turmoil with Ireland, Portugal and Spain, several EU leaders are now considering a significant increase of the euro zone’s 750 billion euro rescue fund. According to Die Welt Online Thursday, the EU commission have already suggested to double the fund. The German government, the ECB  and the Bundesbank have spent the day trying to put out the fire.

Die Welt also writes that Germany –  the economically strongest member of the European community – is rejecting the plans, at least the time being.

After the Irish bailout, the focus is now mainly on Portugal and Spain.

Both countries are under heavy financial pressure these days as their CDS spreads just keep getting wider. This has led investors to doubt that the 750 euro bailout mechanism – The European Financial Stability Fund – that was rushed through the EU parliament earlier this year will be enough to cover even Spain alone if they should ask for help.

In response to questions in Paris Thursday president Alex Weber of the German Bundesbank said: “If the amount is not enough, we can increase it.” Adding: “An attack on the euro has no chance of success.”

I can’t help wondering who these evil attackers of the euro is? The Chinese?

Mr. Weber’s statement might also be interpreted as another way of saying: “We’ll print as much money as we need.”

Die Welt reports that the rest of the fund – assumingly 440 billion euro – could be claimed in the coming months by other countries in the euro area.

Spanish banks have been among the worst performers in recent weeks amid fears over the sovereign’s strength.

“The Markit iTraxx Europe is now 8.5 wider since this time last week and has returned to the levels seen at the beginning of October. Considerable widening in bank spreads, driven by sovereign credit deterioration and talk of burden sharing, has played a major part in the index losing ground,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

Given the Thanksgiving holiday in the US, it was no surprise to see this trend continue today.

Sovereigns were buffeted by headline risk – no change there.

Brian Lenihan, Ireland’s finance minister, insisted that the crucial December budget would be passed by parliament. But the coalition government’s slender majority is expected to be reduced by one if it loses a by-election today, as predicted by the polls. And Enda Kenny, leader of the opposition party Fine Gael, pledged today that he would not be bound by the recent austerity programme.

“Ireland received another blow when LCH Clearnet announced that it would be increasing its margin requirement on the sovereign’s bonds from 30% to 45%, the third rise such rise in as many weeks,” Nolan notes.

Ireland’s spreads widened beyond 600 bp’s Thursday, before recovering later in the session.

German officials, perhaps mindful of their perceived role in exacerbating the current crisis, had a very busy day, trying hard to support the alleged economic recovery.

Angela Merkel stressed that the existing European Financial Stability Fund would not be changed before it expires in 2013.

“German ambiguity around this issue has contributed to the recent widening,” Gavan Nolan at Markit points out.

“There have been rumours that the EFSF would be increased in size, and this topic is one to watch over the coming days,” he concludes.

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  • Markit iTraxx Europe 107.5bp (+0.5), Markit iTraxx Crossover 483bp (+1)
  • Markit iTraxx SovX Western Europe 180bp (0)
  • Markit iTraxx Senior Financials 157bp (0)
  • Sovereigns – Greece 950bp (-22), Spain 301bp (+1), Portugal 480bp (-2), Italy 204bp (+2), Ireland 585bp (+4), Belgium 151bp (+2)

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