Brazil

Speculation is growing that President Luiz Inacio Lula da Silva’s successor will boost deficit spending as Morgan Stanley and Royal Bank of Canada predict the risk associated with Brazilian debt relative to Mexico will climb to a 20-month high.

Credit-default swaps that protect against default by Brazil debt will cost 20 basis points more than contracts for Mexico when presidential elections are held in October, up from a gap of 0.2 basis point, Morgan Stanley and RBC said. A year ago, insurance on Mexican debt cost 29 basis points more than on Brazilian bonds.

The budget gap widened to 3.4 per cent of gross domestic product in June from 1.3 percent in October 2008, the smallest since at least 1995, according to the central bank.

Czech Republic

The Czech government, which is seeking to sell a record amount of bonds this year, aims to cut debt-servicing costs with a “slight” shift toward shorter-term securities in 2011, Finance Minister Miroslav Kalousek said. The Finance Ministry plans to reduce debt costs by four or five per cent next year, Kalousek said in an interview. He also said the ministry will use any revenue in excess of the 2011 forecast to narrow the budget deficit.

German & French yields

The yield on German 10-year bonds was within four basis points of a record low as investors sought the relative safety of government debt amid renewed speculation that Spain and Ireland might struggle with their finances. The yield on the 10-year German bund is around 2.44 per cent.

French 10-year bond yields also held near record lows. The extra yield investors demand for holding Spanish debt instead of German bonds stayed wider for the week on speculation that climbing borrowing costs for the nation’s regional governments put the national budget at risk. French 10-year bond yields are trading at 2.73 per cent.

Greece

The Parliament of Slovakia has rejected paying the country’s share of an international bailout for debt-laden Greece, prompting a reprimand from the European Commission.

The European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said that the vote “will not have any negative implication for the disbursement of the instalments of the loan”. He said he expected EU finance ministers to take up the matter at their next meeting, set for September.

Ireland

Ireland’s borrowing costs rose at an auction of €1 billion of six- and eight-month bills. The country sold €500 million of securities due 14 February 2011, at an average yield of 2.458 per cent compared with that of 1.367 per cent at a 22 July auction of the same bills. Ireland also issued €500 million of securities due 18 April 2011, at an average yield of 2.81 per cent, compared with 1.8 per cent on 22 July.

Turkey

Turkey has delayed fiscal reforms to 2012 and may loosen their parameters, its industry announced this week, a move that analysts said could jeopardize medium-term goals for cutting its budget deficit and public debt. Turkey’s currency, bond and stocks all weakened following the minister’s reported remarks, seen as signalling loosening fiscal discipline ahead of general elections in July 2011.

Data compiled by MPM Capital Investments Ltd of 81, B. Bontadini Street, Birkirkara. MPM Capital Investments Ltd is licensed to conduct Investment Services Business by the Malta Financial Services Authority. MPM can be contacted on [email protected] or 2149 3250. www.mpmci.net