Europe Update

The euro briefly dipped below $1.3430, but this could very well prove to be the low of the day, but is likely capped around $1.3480. The tone may remain fragile as peripheral issues are in the forefront. Germany and France are not finding much support for their proposals at the EU Fin Min meetings. It is increasingly looking like increasing the efficiency of the EFSF is the greatest common denominator. Efficiency refers to the gaps between guarantees and loan capacity in order to retain a triple-A rating.

It is not just that Portugal's 10-year bond yield appears to be sustaining the move through the 7% threshold or that the economy stagnated in H2 10 and the central bank expects it to contract this year. Portuguese 10-year bonds are the hardest hit today in the euro zone. We think the odds that Portugal will have to seek an assistance package are increasing. European officials may what to see the situation can wait and include this in the large comprehensive package ostensibly to be unveiled next month (though a fundamental agreement remains elusive still). The ECB reports it did not settle any bonds last week, which means if market speculation of that the ECB bought Portuguese bonds it was in the latter part of the week and, in any event, did not seem very effective.

Ireland is also under pressure. The 2-year (on the run issue) yield is up 17 bp today, the largest in the region. The 10-year yield is up a more modest 6 bp. Ireland's current government reported made it clear to Germany today that it has not intention on lifting its 12.5% corporate tax schedule. Moreover, the Fine Gael Party, which will likely be a key to the new government continues to press for senior unsecured bank bond holders to share in the pain--i.e., haircuts.

Lastly, note in ECB developments, Belgium's Praet has been chosen to replace Tumpel-Gugerell on the ECB Executive Board. Meanwhile, Finland's CB Governor Lilikanen and a potential compromise candidate for ECB President now that Weber has taken himself out, seeks another term. Applications for the Finland CB head closed today and of the 12 applications, 9 were rejected on grounds of incompleteness.