Overnight Markets- Leading News -Update 3

Spain Suffers From Franco Hangover


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European Credit

Italian bonds slid for the third time in four days after Prime Minister Mario Monti pushed back his balanced-budget goal and predicted a deeper contraction of the economy.

Benchmark German bunds outperformed most of their euro- region peers as investors sought the safest assets, while the nation’s borrowing costs dropped to a record at a sale of two- year notes. Spanish government bonds pared an advance after the Bank of Spain said the country’s bad loans ratio climbed. The nation will auction two- and 10-year securities tomorrow…


Spanish Banks Gorging on Sovereign Bonds Shifts Risk


Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup


IMF Says European Banks May Have to Sell $3.8 Trillion in Assets

European banks could be forced to sell as much as $3.8 trillion in assets through 2013 and curb lending if governments fall short of their pledges to stem the sovereign debt crisis or face a shock their firewall can’t contain, the International Monetary Fund said.

In a study of 58 banks including BNP Paribas SA (BNP) and Deutsche Bank AG (DBK), the IMF forecast that under such circumstances, gross domestic product in the 17-country euro region would be 1.4 percent lower than now expected after two years. Even under its baseline scenario, the IMF sees banks’ combined balance sheets possibly shrinking by as much as $2.6 trillion.

“So far, deleveraging has occurred predominantly through buttressing capital positions and reducing non-core activities, leaving the impact on the rest of the world manageable,” the IMF said in its Global Financial Stability Report released today. “It is essential to continue to avoid a synchronized, large-scale, and aggressive trimming of balance sheets that could do serious damage to asset prices, credit supply, and economic activity in Europe and beyond.”

The Washington-based IMF sees a resurgence of Europe’s debt turmoil as the biggest threat to global growth even after steps taken by governments and the European Central Bank helped ease tensions in financial markets. The challenge for policy makers is to make sure banks keep lending to companies and individuals even as they boost capital to comply with regulators’ requests…


Worst Yet to Come as Crisis Rescue Cash Ebbs, Deutsche Bank Says

The worst may be yet to come in the global financial crisis as the central bank spending that kept defaults low runs out, according to Deutsche Bank AG. (DBK)

Credit-default swap prices imply that four or more European nations may suffer so-called credit events such as having to restructure their debt, strategists led by Jim Reid and Nick Burns said in a note. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments including Spain and Italy jumped 26 percent in the past month as the region’s crisis flared up.

If these implied defaults come vaguely close to being realised then the next five years of corporate and financial defaults could easily be worse than the last five relatively calm years,” the analysts in London said. “Much may eventually depend on how much money-printing can be tolerated as we are very close to being maxed out fiscally.”

Default rates stayed in line with historical norms between 2007 and 2011 because of the “unprecedented intervention” of European and U.S. policy makers, the analysts wrote in the report yesterday. Now, credit markets are giving up the gains that followed the European Central Bank’s 1 trillion-euro ($1.3 trillion) longer-term refinancing operations and the U.S.’s Operation Twist that buoyed government bonds.

Although defaults have been low, recoveries are falling because the public spending that kept non-payments down has failed to spur economic growth, according to the analysts.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“The LTROs gave us some respite but they don’t appear to have taken the problem away,” Burns said in a phone interview. “At the moment there are no more LTROs on the table.”


China Home Prices Fall in More Than Half Cities Tracked


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