* Spanish bond shortage distorts repo market
* Italian rates rise but market still functioning
* Interbank cash rates fall on rate cut expectations
By Kirsten Donovan
LONDON, June 18 (Reuters) - A lack of available Spanish government bonds, due to so many being used to obtain funding at the European Central Bank, is distorting pricing in repo markets and causing investors headaches as they seek to cover hefty short positions.
As international investors sold Spanish government bonds this year, domestic banks bought them and parked them at the ECB in return for funds - particularly during the two recent three-year funding operations.
As a result, investors who need the bonds because of their own short positions must pay a premium for the paper.
When this happens in repo markets - where banks commonly use government bonds as collateral to raise funding - bonds are said to be trading "special".
Effectively, the investor who needs the bonds pays a premium to their counterparty in the trade - the opposite of a typical repo trade where the party borrowing cash pays the premium.
"There's some good evidence of a collateral shortage out there," said ICAP rate strategist Chris Clark. "Quite a lot may be being used at the ECB and the market short (positions) out there will be increasing the demand for specific bonds."
It is the opposite of what might be expected when a country's debt comes under pressure. Then counterparties are usually more reluctant to be left holding the bonds.
"The collateral just isn't there. That's one of the problems and the few bonds that are still available are highly sought after by people who want to cover their short positions," said Commerzbank rate strategist Benjamin Schroeder.
Ten-year Spanish government bond yields have risen more than 130 basis points since the start of May, while two-year yields are up over 2 percentage points.
That prompted international clearing house LCH.Clearnet SA to increase the cost of using Spanish bonds to raise funds via its repo service last month. Analysts said their trading desks had since seen volumes over the platform drop.
"It's a further segregation of European money markets, where banks are retreating from central clearing houses and going back to domestic clearing or bilateral agreements," Schroeder said.
As the euro zone debt crisis intensified this month, mainly due to worries about Spain's banking sector, Italian general collateral (GC) repo rates, paid to borrow funds against a basket of government bonds, have been pushed higher.
There is little trade in the Spanish general collateral market but banks are still able to borrow using Italian bonds as collateral, despite Italy being seen as vulnerable to contagion from worries about Spain.
Three-month Italian GC rates rose to 0.42 percent at the end of last week, compared to the Eonia overnight rate at around 30 basis points, according to ICAP. The Italian rate had traded below Eonia from the time of the ECB's second three-year funding operation at the end of February until the end of May.
"There's been a rise in Italian general collateral rates, both outright and relative to the Eonia OIS curve," ICAP's Clark said. "Despite a reduction in the amount of term activity that goes on, the Italian market is still very much functional."
RATE SPECULATION
Three-month Euribor interbank lending rates eased again, hitting their lowest since the second quarter of 2010 as speculation grew the ECB may cut interest rates.
ECB president Mario Draghi heightened expectations the bank could cut interest rates or take further policy action soon after saying on Friday that the euro zone economy faced serious risks and no inflation threat.
September and December Euribor futures contracts rallied to contract highs, pushing implied rates lower.
Markets are pricing in a 50 percent chance of a 12.5 basis point cut in the ECB's 0.25 percent deposit rate this year, and a 25 percent of the rate being cut to zero, according to RBS.
India's finance minister says Fitch ignored positive economic trends - Chicago Tribune
Poland in Better Shape Now to Face Euro Crisis - Finance Minister - NASDAQ
By Marcin Sobczyk
WARSAW--Poland is in a much stronger position "thanks to others buying time during the euro-zone crisis" and after taking steps to reduce its public deficit, said Finance Minister Jan Vincent-Rostowski on Monday.
"We're much stronger in the face of this storm," Mr. Rostowski said on radio RMF FM, reiterating Poland's plan to trim public deficit to 3% of economic output this year from 5.1% in 2011.
Poland's deficit peaked at 7.8% of economic output in 2010, raising concerns at the time over the country's public finance. The Polish government has been trimming the country's deficit with higher taxes, a cap on spending growth of some budget items and a cut of cash transfers to private pension funds.
Poland is the only country in the European Union to have avoided a recession during the financial crisis. The Polish economy grew 3.5% on the year in the first quarter and the central bank expects it to grow about 3% this year.
Higher infrastructure spending in the run-up to the European soccer championship, which Poland is co-hosting with Ukraine this month, is thought to have contributed to Poland's recent growth. Some economists have said that public spending will dry up after the tournament, reducing the pace of Poland's economist expansion.
Mr. Rostowski said Poland will continue to build roads for the rest of this year and in 2013, with less activity in 2014. Road construction should accelerate again from 2015 when EU subsidies from the bloc's new budgetary plan begin-- these are meant for poorer members to help them catch up with the EU's more advanced economies.
Write to Marcin Sobczyk at marcin.sobczyk@dowjones.com
(END) Dow Jones Newswires 06-18-120334ET Copyright (c) 2012 Dow Jones & Company, Inc.
More money means more pain for fans - FOXSports.com
LONDON, England
If money is the root of all evil, then somebody forgot to tell supporters of Manchester City and Chelsea - both of whom get to spend the summer floating in a happy daze.
Before the arrival of their sugar daddies, backed by petrodollars from Abu Dhabi and Russia respectively, City were light years away from winning the Premier League title and Chelsea were hardly earmarked as contenders for the Champions League. Now, they are trophy-holders and serious contenders for next season.
Cash is not always king in football but it sure helps. For all the teams without billionaire benefactors, the mission to keep up with the spiraling salaries and trumped-up transfer fees is a challenge that is as overwhelming as it is risky. Some 60 per cent of Premier League clubs reported a loss when the last financial accounts were released.
Competing with the likes of City and Chelsea in the money league is an impossible task, so the rest have to be resourceful, and hope that the new regulations designed to try to encourage clubs to run themselves as a sustainable business (a pan-European initiative called Financial Fair Play) actually begin to shackle the spending power of the super rich. Not everyone, it must be said, is holding their breath on that one even if it is a nice idea.
And now there is suddenly even more money sloshing around for every Premier League club to get their hands on. A new, record-breaking television deal, worth a record $4.7 billion over three years — up a whopping 71 per cent on the previous arrangement — will soon be boosting the coffers everywhere. This is just a deal for domestic television rights, so when internet and overseas deals are factored in, the Premier League’s broadcasting worth is estimated at closer to a stunning $8 billion.
Each club is guaranteed at least $22 million more each year than they previously received. To put that into perspective, that means the last-placed finisher in 2013 will probably get more than Manchester City earned for finishing top of the Premier League pile last season. That sum, incidentally, totaled $95 million.
The Premier League’s chief executive, Richard Scudamore, believes the deal is very significant in comparison to major overseas clubs such as Real Madrid, Barcelona, AC Milan, Bayern Munich and so on.
"It allows people to plan and gives us a degree of financial security. I don't underestimate that,” he said. “The idea you can plan with some certainty your revenues for the next four years is a big thing."
And in fact, there is an interesting comparison with Spain’s La Liga, in which the heavyweighs from Barcelona and Madrid negotiate their own television rights individually. They can pull in around $200 million per season, but the smallest clubs earn a fraction – in the region of $20 million. The Premier League have a system where the deal is struck collectively. All boats are raised in England under this new deal – and suddenly, a leap to the Premier League means so much more to the teams in the Championship, a rung below.
It is questionable how great all this will turn out to be for fans, however. Somebody has to pay for these mega-deals, and part of the cost will presumably be passed on to the consumers in the form of price hikes for subscription channels that deliver football coverage. Live games have been the preserve of the pay-per-view channels in England for 20 years now. In that time, the cost of attending a match inside the stadium has ballooned, too.
But the increase is fabulous news, obviously, for clubs, players and the wheeler-dealer agents who squeeze every drop of earnings out that they can. It is likely that the $300,000 a week salary that Carlos Tevez takes home will soon be dwarfed. And with some big stars — Emmanuel Adebayor, Luka Modric and Robin van Persie come to mind — seeking improved deals, there are fewer reasons for clubs to stretch their payrolls.
As yet , there has not been an obvious knock-on effect in terms of the Premier League’s transfer activity. Only Chelsea have been notably lavish in advance of the European Championship, with the Belgian playmaker Eden Hazard arriving and Porto’s Hulk very strongly linked with a big money move. A greater indication of whether this gives clubs more clout in the market will come when the Euros finish.
Bruce Buck, Chelsea’s chairman, predicted Abramovich is eager to up the ante to help his team to build on the Champions League win. “We’ve seen him, year after year, invest and put his hand in his pocket and spend big money. He may go to another level now,” said Buck.
Chelsea, which starts next season's Premier League campaign at Wigan, are desperate for a stronger challenge in the league. City will kick off its title defense at home to Southampton but are eager to make more of a go of it in the Champions League.
Manchester United are intent on bouncing back, but have a tough start to the season against Everton - the team that wrecked United's title dream. Arsenal, who host Sunderland on the opening day, have to try to stay in the top four. Liverpool, who face Tottenham, Arsenal and Manchester City, in three of their first four fixtures, are under pressure to improve.
Now there is even more money to make the football world go round.
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