The Irish bailout, like the Fed’s latest round of quantitative easing, was supposed to bring interest rates down. Instead, spreads throughout the euro zone are blowing out again.
Tthe cost of insuring Irish government bonds bailout increased 22 basis points compared to the cost of similar protection for German bonds of similar duration. Likewise, Portuguese credit default spreads are 30 basis points wider, Spanish spreads 20 points wider and Hungarian bonds — although not technically in the euro zone — are 25 basis points more expensive on a relative basis.
Mixed comments from Spain and Germany are confusing the markets on whether bondholders should share in any aid or restructuring. And confusion here is not a good thing.
The German press is reporting that the EU — and especially Spain — are pushing Portugal to ask for aid now. Portugal claims they are doing well enough on their own, but even though Lisbon passed a sweeping austerity budget, the rumors are still circulating.
Expect more details on the Irish bailout in Sunday’s teleconference. The discussions seem to define the speculated €85B program with €35B going to the financial sector and the other €50B going straight to Dublin.
Meanwhile, Spanish prime minister Zapatero has ruled out any chance that Madrid will take rescue aid. But with rustling about Belgium — which is selling bonds Monday — being the next country to fall under the contagion microscope, anything can happen.