Peripheral countries share Europe’s exuberance, Interactive Data

European markets have entered 2013 on a positive note after the US Congress passed new tax legislation, and adding to the general exuberance and further bolstering risk appetites was the extension of the Basel III implementation schedule by European regulators, according to financial data provider Interactive Data.

“While many of the affected institutions have been pre-emptively deleveraging and raising fresh capital to get ahead of the anticipated changes, the longer time line (phased implementation over the period from 2015 to 2019) is certainly a positive development from a supply standpoint, as it reduces the impetus for banks to flood the marketplace with legacy securities, and keeps the carry trade intact for the near term,” the firm said.

Peripheral European government bond 10 year yields decreased in January with Portugal moving from 7.01% to 6.5%, Italy from 4.43% to 4.2% and Spain from 5.26% to 5.04%.

Greek government yields also dropped on the month with the 10 year benchmark moving from 11.6% to 10.6%.

The dip in yields allowed the Italian government to come back to the mid-to-long term bond market on January 15 with a €6bn offering of 4.75% 2028 bonds sold at an average yield of 4.805%.

By the end of the month however, Spanish and Italian yields were adversely affected by the political situation in both countries: the general election campaign in Italy and the opposition’s accusation of Prime Minister Mariano Rajoy accepting illegal donations in Spain. Spanish unemployment rose in January by 132,000 adding to political and economic pressures.

Elsewhere, the troubled Cypriot economy was downgraded by Moody’s by three notches to Caa3 on January 11 which, with politicians not being able to agree on proceedings, triggered a warning from the ECB President Mario Draghi that letting Cyprus default could lead to similar mistakes that were made with Greece. At the end of the month it was revealed that the country will need at least €10bn to bailout its banks.

The corporate markets followed the prevailing good mood in the first three weeks of the month. However, after the news of the downfall of SNS Bank in Holland, Monte dei Paschi derivative trade losses in Italy and poor December retail sales data from major European economies, spreads widened before the end of month.

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