A couple of news stories in the ongoing sovereign debt crisis.
The cost of insuring Irish debt against default hit a fresh record Friday with investors fearing that Ireland’s draconian budget cuts will slow economic growth and further weaken public finances.
Spreads on Irish five-year sovereign credit default swaps topped 6.10 percentage points Friday, according to data provider Markit, after having briefly touched 600 basis points Thursday.
This means that investors will have to pay EUR610,000 annually to ensure EUR10 million Irish debt against default. Some market watchers note that CDS trading starts to dry up at these levels as investors worry about being caught on the wrong side of the trade.
CDS are tradable, over-the-counter derivatives that function like an insurance contract for defaulting on debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller.
The Irish 10-year yield spread over German bunds, which show how large a premium investors demand to hold Irish bonds versus more-stable German debt, also hit a record of 5.31 percentage points Friday.
The Bank of Spain on Friday said it estimates third-quarter gross domestic product in the country was unchanged from the prior quarter. That follows a gain of 0.2% in the second and 0.1% in the first quarter. In a monthly economic bulletin, the Bank of Spain said the economy likely grew 0.2% on an annual basis in the third quarter. Official third-quarter GDP data will be released by the National Statistics Institute on Nov. 11. The Bank of Spain said growth was likely stymied by government austerity measures and the effects of consumers tightening spending as value-added taxes went up from July 1.
Today, the Dollar is up as traders sell Euros. Even with the Dollar up (which usually hurts commodity prices), gold and the other precious metals are rallying to record highs. Traders are looking for safety as the chances of an Irish default increase. Furthermore, we are seeing in Spain that “austerity” is a bitter but necessary medicine.
After years of liberal government spending and big deficits, Ireland and Spain (along with Greece and Portugal) are damned if they do and damned if they don’t. Unfortunately, the United States is not that far behind them.