(BN) Sovereign Debt Risk Surges in Europe as Slowdown May Deepen Deficit Woes

Bloomberg News, sent from my iPhone.

Sovereign Debt Risk Surges as Slowdown May Deepen Deficit Woes

Aug. 12 (Bloomberg) -- A gauge of government bond risk rose to the highest level in five weeks on concern Europe's deficit crisis will worsen as slowing economic growth exacerbates bank bailout costs.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose for a seventh day, climbing 4 basis points to 140, according to data provider CMA. The gauge is the highest since July 7 and up from a three-month low of 109.5 on Aug. 3.

Swaps on Ireland climbed to a 17-month high on speculation the $32 billion bailout bill for Anglo Irish Bank Corp. will add to the country's fiscal deficit. Greece's economy contracted for a seventh quarter and unemployment claims in the U.S. unexpectedly rose, deepening concern of a so-called double-dip recession.

"A weakening macro picture leading to increasing budget deficits for sovereigns has led to sovereign spreads widening again," BNP Paribas SA strategists in London wrote in a note to investors. "The size of 'Bad Anglo' while not finalized yet will probably add quite a bit to the Irish national debt."

Ireland's borrowing costs rose at an auction of 1 billion euros ($1.28 billion) of six and eight-month bills today. The country sold 500 million euros of securities due Feb. 14, 2011, at an average yield of 2.458 percent, compared with 1.367 percent at a July 22 auction of similar bills.

Bailout Costs

The cost of the Anglo bailout may trigger a surge in Ireland's budget deficit to 25 percent of GDP this year, before dropping to 10 percent in 2011, analysts at Dublin-based Davy Research wrote in a note today. The European Union limit for members of the euro area is 3 percent.

Default swaps on Ireland climbed 15 basis points to 286, the highest since March 2009, CMA prices show. Contracts on Anglo Irish jumped 17.5 to 551.5, Allied Irish Banks Plc increased 17.5 to 441 and Irish Life & Permanent Group Holdings Plc rose 14.5 to 337.

Germany may also have to absorb the holdings of two so- called bad banks, raising the nation's debt to 90 percent of gross domestic product, Die Zeit reported. Contracts on Germany increased 3 basis points to 47, the highest since June 29.

Swaps on Greece jumped 17.5 basis points to 809.5 as the wage-cuts and tax increases that aim to trim the European Union's second-biggest budget deficit deepened a recession. Contracts on Portugal climbed 8.5 basis points to 277, Italy rose 10 to 182 and Spain was 7 higher at 221.

U.S. Treasuries

The cost of hedging against losses on U.S. Treasuries climbed for the eighth day, with default swaps rising 1 basis point to 49.5, the highest level since February. Initial jobless claims rose by 2,000 to 484,000 in the week ended Aug. 7, the highest since mid February, Labor Department figures showed.

The cost of insuring corporate debt against default also rose with the Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increasing 16 basis points to 520, according to JPMorgan Chase & Co., the highest in three weeks.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 4.25 basis points to 116.25, and the Markit iTraxx Financial Index of 25 banks and insurers rose 5.5 to 137.5, JPMorgan prices show.

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. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

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Fwd: Budget Bulletin: Trustees Report: Social Security and Medicare are Unsustainable

Budget Bulletin Your source for federal budget news and analysis Recent Updates It's Official: Medicare's Finances Shadowed by Uncertainty 2010 Social Security Trustees Report Continues to Show the Urgency of Reform U.S. Long-Term Debt Situation Is One of the World's Worst Featured Research Trustees Report: Social Security and Medicare are Unsustainable By Nicola Moore The Social Security and Medicare Trustees today released their annual reports on the fiscal condition of the programs, and the situation for these programs is still dire. Although the programs' fiscal health hasn't worsened since last year, both programs are still on an unsustainable course. Most significantly, the programs are running trillion-dollar shortfalls because they've promised more benefits than they can afford: Social Security has a $7.9 trillion shortfall (up $0.1 trillion from last year), which means the program would require $7.9 trillion in cash—today!—to afford its promises. Alternatively, closing that gap would require payroll taxes to rise immediately and permanently from 12.4 percent of earnings to 14.24 percent. For a worker earning $50,000, that's a $920 tax increase. Medicare has a $30.8 trillion shortfall. To put that into perspective, that is more than twice the size of the entire U.S. economy, which means it would be impossible to infuse enough cash into Medicare to fix the program. However, the assumptions used to arrive at this number give new meaning to the word optimistic. The good news for Social Security is that the basic position of the trust fund is unchanged: The trust fund, which is currently running deficits and will rebound by 2012, will begin to run deficits in 2015, and the whole piggy bank will be exhausted 2037. The bad news for workers, as the Trustees indicated, is that the main reason these dates are unchanged is that workers will be paying more in payroll taxes thanks to Obamacare, which has made a larger share of earnings subject to Social Security taxes. >> Click here to read Nicola Moore's full report Chart of the Week Get more charts with Heritage's Federal Revenue and Spending Book of Charts About The Heritage Foundation Founded in 1973, The Heritage Foundation is a research and educational institute - a think tank - whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. The Heritage Foundation | 214 Massachusetts Ave NE, Washington, DC 20002 | 202.546.4400

Fwd: Morning Bell: The Dodd-Frank Bailout is Already Here

08/12/2010 The Dodd-Frank Bailout is Already Here On July 21, when President Barack Obama signed the Dodd-Frank financial regulation bill, he promised: "There will be no more taxpayer-funded bailouts. Period." How long will this Obama promise last? Well, The New York Times reports today that  "the Obama administration on Wednesday pumped $3 billion into programs intended to stop the unemployed from losing their homes," including a program announced by the Department of Housing and Urban Development that "will draw on $1 billion authorized by the new financial overhaul law." That's right. The Dodd-Frank "no more taxpayer-funded bailouts forever" bill is not even a month old, and already President Obama is using it to turn your tax dollars into yet another bailout. And why is the Obama administration turning to Dodd-Frank bailout funds so soon after passage? Because its original mortgage bailout plan, the Home Affordable Modification Program (HAMP), has been a complete failure. Don't take our word for it. Here are the words of Special Inspector General for the Troubled Asset Relief Program Neil Barofsky: Unfortunately, HAMP continues to struggle to achieve its original stated objective, to help millions of homeowners avoid foreclosure "by reducing monthly payments to sustainable levels." Despite a seemingly ever increasing array of HAMP-related initiatives designed to encourage participation in the program, the number of homeowners being helped through permanent modifications remains anemic, with fewer than 400,000 ongoing permanent modifications…and HAMP has not put an appreciable dent in foreclosure filings. Indeed, the number of trial and permanent modifications that have been canceled substantially exceeds the number of homeowners helped through permanent modifications.