Fear of sovereign risk

Big sell-off in EUR in the past a few days as sovereign debt issues dominated news headlines. At focus were Greece's ability to rein in its fiscal problems, Iceland president's veto on repaying UK and Netheland government the bailout fund for depositors who lost on the now-defunct Icesave bank, and lower German Economic Sentiment measured by ZEW survey.

ZEW is a collection of survey results with hundred of financial experts and is referred to as indication of economic sentiment.

http://www.zew.de/en/

ECB kept rate at 1% as expected on 14 Jan decision and warned the recovery of Euro zone would be bumpy. EUR has come down by 3% since then. It fell to 5-month low against USD yesterday morning to 1.407.

The fear of sovereign default is ongoing development. Financial crisis normally accompanies fiscal crisis/currency crisis/sovereign default as the days of extravagant spending of the welfare states is over and the payback time nears. It's a social and political struggle to face the bitterness of reality. Now Greece's 5-yr CDS trades at over 300bps, higher than Philippines and Indonesia. It adds further cost to Greece government and makes raising new debt more difficult.

Other news that's driving the market include China's increase of deposit reserve and fear of asset bubbles. China GDP grew at 8.7% in 2009, amid banking lending at 9.6 trillion yuan, which is a 96% increase over 2008. Central government has spoken a few times on reining in credit growth in 2010 and targeted new lending limit of 7.5 trillion yuan this year, a 24% drop. Yesterday friend in China told me that banks have frozen (yes literally no work for credit officers) new loan approvals until Feb.

Equity market and emerging market/commodity currencies also pulled back a bit in the past a few days.

US 10-yr bond yield dropped to 3.65% from 3.8% of last week.