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Economy

For some European states, rising debt costs rekindle 2011 crisis memories

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© Reuters. FILE PHOTO: The colours of the European Union illuminates the south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 30, 2021. REUTERS/Wolfgang Rattay/File Photo

By Dhara Ranasinghe

LONDON (Reuters) – The rise in European bond yields is alarming some economists, who warn that Italy and Greece in particular do not have much wiggle room before their debt servicing burden starts rising, rekindling memories of the 2011-2012 euro debt crisis.

Just five months into the year and even before the European Central Bank tightens policy, French and German 10-year debt yields are up over 120 basis points and set for their biggest annual surge since 1999 – the year the euro was born. Spanish, Italian and Portuguese yields are up more than 155 bps.

Higher yields are not confined to Europe – Janus Henderson predicts debt interest costs globally will rise by almost 15% this year compared with 2021. But the euro bloc, with some of the world’s most highly indebted sovereigns, is among the most vulnerable.

Indebtedness there has actually risen since the 2010-2012 crisis, when spiralling borrowing costs in Ireland and southern Europe threatened the very existence of the euro bloc, partly a result of the unexpected burden of the COVID-19 pandemic.

“If rates were to rise sharply for longer, we might well be facing Euro Crisis 2.0,” Deutsche Bank (ETR:DBKGn) investment strategist Maximilian Uleer said.

Uleer said while interest costs had fallen since 2011, debt as a share of gross domestic product was higher, especially in countries that were at the epicentre of the 2011 crisis.

So if Italian 10-year bond yields were to rise by 2% next year, its interest burden relative to GDP would be back at 2011 levels by end-2025, Uleer estimates.

The process has already started. Yields on Italian seven-year bonds, which represent the country’s average debt maturity, are now at 2.65%, well above the average or implicit interest rate it has been paying, as estimated by the European Commission at 2.4%.

This matters because any new debt issued from now will likely raise the country’s interest payment costs.

French yields are also above the implicit interest rate, estimated at 1.1%, Spanish yields are close to the 2% implicit rate there. This last happened in 2011-2012, Pictet Asset Management noted.

NO SWEAT?

For all that, debt sustainability is not an imminent risk.

Borrowing costs remain low by historical standards, while an average debt maturity of around seven years will shield most countries from near-term yield spikes.

Spain for instance needs to refinance only 15% of its debt this year, a Spanish Treasury official told Reuters, adding that the “deep mark” from the crisis had forced changes to debt portfolios, including by increasing debt maturities.

Even for Italy, the direct fiscal cost of rising rates “looks manageable” according to S&P Global (NYSE:SPGI) European sovereign analyst Frank Gill.

Between January and end-April, Italy pre-financed two-thirds of its maximum full-year net borrowing target of 80 billion euros and at an average refinancing cost of 0.54%, Gill noted.

“The bigger risk is that higher rates start to drag on growth,” he said.

SLOWING GROWTH, RISING YIELDS

Rising debt is of particular concern, given growth threats; the International Monetary Fund sees the euro area economy expanding this year by just 2.8%, versus a previous 3.9% prediction.

“We need growth,” said Pictet Wealth Management fixed income strategist Laureline Renaud-Chatelain. “That’s a bit of a worry, as you have the ECB that will, maybe, raise rates even in a context where we have seen growth decelerating.”

Unease has driven up the cost of insuring against a debt default in Italy, Spain and Portugal to the highest since November 2020 in the credit default swaps market.

Italy and Greece, with debt-to-GDP ratios of 150% and 200% respectively, up from around 120% and 175% in 2011, are in particular focus.

Jim Leaviss, chief investment officer at M&G Investments for public fixed income, highlights as crucial the 3% level on Italian 10-year yields, breached recently for the first time since 2018.

“If yields stay above 3%, then you would expect the debt burden in Italy to start rising,” Leaviss said.

Goldman Sachs (NYSE:GS), meanwhile, calculates that a 50 bps rise in yields from current levels would put Italy’s debt-GDP ratio on a rising path from 2025 onwards.

In Greece, 10-year yields above 3% more than double the 1.6% weighted average cost of the debt profile estimated over 2022, Scope Ratings economist Dennis Shen said.

That means the average cost of servicing outstanding Greek debt is “for the first time in years increasing, rather than decreasing as the government refinances,” Shen added.

Economy

Dollar slips from 2-decade highs; yuan falls on weak China data

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© Reuters. FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic

By Sinéad Carew

NEW YORK (Reuters) – The U.S. dollar index was lower on Monday after hitting a 20-year peak last week, with the global economy in focus after weak economic data from China highlighted worries about the prospects for a global slowdown.

Creating a risk-off mood on Monday, China’s retail and factory activity fell sharply in April as extensive COVID-19 lockdowns confined workers and consumers to their homes. But Shanghai did set out plans for the return to more normal life from June 1.

Following the release of China’s data, Bipan Rai, North America head of FX Strategy at CIBC Capital Markets, said trading was focused on macro economic data on Monday.

“It’s important to highlight that the risks are towards a stronger dollar and primarily, that’s because if you look at the macro economic climate, the fundamentals don’t look good. From a risk-off perspective that should still support the dollar against most currencies,” Rai said.

But he said the greenback was consolidating after its recent strength and that more range-bound trading sessions were possible: “It makes sense for some period of consolidation before the next leg higher.”

Trading in the dollar may be muted partly because a lot of bad news has already been priced in but also because investors are waiting for events such as the U.S. retail sales data release and a public appearance by Fed Chair Jerome Powell both scheduled for Tuesday, according to Mazen Issa, senior FX strategist at TD Securities. [nL2N2X52F6]

Still Issa said he doesn’t “think we’re in a market where we’re going to see the dollar weaken … It’s going to take a lot to get investors out of the dollar.”

The euro was pulled from its earlier lows after European Central Bank policymaker Francois Villeroy de Galhau said the common currency’s weakness could threaten the ECB’s efforts to steer inflation towards its target.

The Australian dollar, which is highly exposed to the Chinese economy, reversed course as the day wore on and was last up against the dollar after falling as much as 0.9%.

The dollar index was last down 0.37% at 104.16, after briefly crossing the 105 level on Friday – its highest level since December 2002, after six successive weeks of gains. Weekly positioning data showed that investors had built their long dollar bets.

The euro was up 0.26% at $1.0438 but not far from last week’s low of $1.0354, its lowest level since early 2017. Analysts see $1.0340 as a crucial level of euro support.

HSBC strategists expect the euro to fall to parity against the dollar in the coming year. “Much weaker growth and much higher inflation leave the ECB facing one of the toughest policy challenges in G10 (central banks),” they said.

Crypto markets, which trade around the clock, had a quiet weekend after turmoil last week driven by TerraUSD, a so-called stablecoin, which broke its dollar peg. An affiliate of the company behind TerraUSD said it had spent the bulk of its reserves trying to defend its dollar peg and would use the remainder to try to compensate some users who had lost out.

Bitcoin was last trading at around $29,881, down more than 4%, after having dropped to $25,400 on Thursday, its lowest mark since December 2020.

Currency bid prices at 3:03PM (1903 GMT)

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Economy

Taliban dissolve Afghanistan’s Human Rights Commission, other key bodies

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© Reuters. FILE PHOTO: An Afghan woman walks on a street in Kabul, Afghanistan, May 9, 2022. REUTERS/Ali Khara/File Photo

By Mohammad Yunus Yawar

KABUL (Reuters) – Taliban authorities in Afghanistan dissolved five key departments of the former U.S.-backed government, including the country’s Human Rights Commission, deeming them unnecessary in the face of a financial crunch, an official said on Monday.

Afghanistan faces a budget deficit of 44 billion Afghanis ($501 million) this financial year, Taliban authorities said on Saturday as they announced their first annual national budget since taking over the war-torn country last August.

“Because these departments were not deemed necessary and were not included in the budget, they have been dissolved,” Innamullah Samangani, the Taliban government’s deputy spokesman, told Reuters.

Also dissolved was the High Council for National Reconciliation (HCNR), the once high-powered National Security Council, and the commission for overseeing the implementation of the Afghan constitution.

The HCNR was last headed by former Afghan President Abdullah Abdullah, and was working to negotiate a peace between the U.S.-backed government of former President Ashraf Ghani and the then-insurgent Taliban.

In August 2021, 20 years after invading Afghanistan, foreign forces withdrew from the country leading to the collapse of the government and a Taliban takeover.

Samangani said the national budget was “based on objective facts” and intended only for departments that had been active and productive.

He added that the bodies could be reactivated in the future “if needed”.

The Taliban ruled Afghanistan from 1996 to 2001 with an iron fist and implemented a harsh version of Islamic rule, including banning women from education and work. After taking over last year, the Taliban assured the world they would be more moderate.

However, they are yet to allow older girls to restart education, and have also introduced rules that mandate that women and girls wear veils and requiring them to have male relatives accompany them in public places.

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Economy

U.S. SEC chair says much to be done to protect crypto investors

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2/2

© Reuters. FILE PHOTO: Representations of virtual cryptocurrencies are placed on U.S. dollar banknotes in this illustration taken November 28, 2021. REUTERS/Dado Ruvic

2/2

By John McCrank

(Reuters) – Cryptocurrency assets are highly speculative and investors in them need more protections or they could lose trust in the markets, Gary Gensler, chair of the U.S. Securities and Exchange Commission, said on Monday.

Generally, people who buy cryptocurrencies do not get the disclosures they get when they make other asset purchases around things like whether the trading platform they are using is actually trading against them, or whether they actually own the assets they store in digital wallets, Gensler said.

“We have this basic bargain: You the investing public can make your choices about the risk you take, but there is supposed to be full and fair disclosure, and people are not supposed to lie to you,” he said at the Financial Industry Regulatory Authority’s annual conference in Washington.

His comments came after last week’s spectacular collapse of TerraUSD, a so-called stablecoin that lost its 1-to-1 dollar peg.

The token’s crash sent cryptocurrencies tumbling, a slide that resumed on Monday, as bitcoin erased the gains it had eked out over the weekend to trade under $30,000, far below its Nov. 10 record of $69,000.

While crypto markets are thought of as decentralized, the reality is that most activity occurs on a handful of trading platforms, which, along with token issuers, need to work with the SEC to improve industry rules and disclosures, Gensler said.

He pointed to basic market principles like, “anti-fraud, anti-manipulation, making sure there’s not front-running, making sure an order book is actually real and not made up.”

The SEC will continue to be “a cop on the beat,” while working with the Commodity Futures Trading Commission to ensure all cryptocurrencies are covered, Gensler said.

“There’s a lot to be done here, and in the meantime the investing public is not that well protected,” he said.

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