EU deal to include investors in default worsened crisis-BIS

FRANKFURT, Dec 12 (BestGrowthStock) – Germany and France agreeing to
make investors participate in losses in sovereign default was an
important factor in the intensification of the euro zone
sovereign debt crisis, a Bank for International Settlements
report said on Sunday.

The BIS quarterly review said that this agreement and the
worsening fiscal situation in Ireland were the two factors
driving some euro zone countries’ credit spreads upward.

“The surge in sovereign credit spreads began on Oct. 18,
when the French and German governments agreed to take steps that
would make it possible to impose haircuts on bonds should a
government not be able to service its debt,” the report said.

“Focus quickly turned to the Irish banking system, which has
grown more reliant on the central bank as repo market loans
using Irish government bonds as collateral had become
prohibitively expensive.”

The report said there was no obvious information triggering
investors beginning to eye Portuguese and Spanish debt, and
later Belgian and Italian ones, where bond and CDS spreads
reached new highs.

BIS also said that in the past three months, expectation and
then actualisation of further monetary easing dissipated
concerns of deflation taking hold in the United States, and
spreads between 10- and 30-year Treasury bonds indicated higher
expected inflation.

“This would indicate that the Fed had raised inflation
expectations,” the BIS report said. “Concerns about deflation in
the United States began to abate from around September onwards.”

The Fed committed in early November to buying $600 billion
more in government bonds by the middle of next year in an
attempt to breathe new life into a struggling U.S. economy.

In the past three months, emerging economies saw increasing
inflationary pressures following their quick rebound from the
global financial crisis, the BIS also said.
(Reporting by Sakari Suoninen; Editing by Toby Chopra)

EU deal to include investors in default worsened crisis-BIS