Junk bonds: Easy money has been kind to risky companies and their lenders. Firms like Clearwire Communications and HCA found critical funding in 2010, while investors in their bonds have enjoyed stellar double-digit returns, with the Bank of America Merrill Lynch high yield index returning nearly 14 per cent by early December. So much money sloshing around the global financial system, however, also makes for outsized distortions and in 2011 could trigger a junk bond correction.

Trash bash

Business Standard

ECB stress tests: The European Central Bank is becoming increasingly vocal in its opposition to a Greek debt restructuring. That has led many to believe that its own balance sheet would suffer a body blow in such an eventuality. But a Breakingviews analysis suggests that is not so.

Not lethal, but serious

Portugal: Moody&rsquo;s hasn&rsquo;t made any new friends in the euro zone by downgrading Portugal&rsquo;s debt by four notches to junk status. The rating agency&rsquo;s decision may look harsh and even unfair, since the Portuguese government is only a few weeks into implementing the austerity programme it agreed on in exchange for its euro 78 billion bailout by the euro zone and International Monetary Fund. But, Portugal doesn&rsquo;t have the luxury to ponder what&rsquo;s &ldquo;fair&rdquo; or not. It should listen to what its creditors are saying and act accordingly.

Beware of the risk

Finance directors may start giving finance ministers a run for their money. The woeful state of national balance sheets will push risk-averse investors into highly rated companies like Microsoft and other cash-rich issuers best positioned to withstand uncertain times. Corporate bonds could prove more attractive than even top-quality sovereigns.

Sovereignty

European governments have suffered a triple setback. Standard &amp; Poor&rsquo;s has stripped France and Austria of their triple-A ratings, and cut Italy to the same level as Ireland. Greek debt talks have broken down, while the European Central Bank has criticised the region&rsquo;s fiscal pact. After a brief lull, the euro zone&rsquo;s sovereign debt crisis is back with a vengeance.

The party's over

A German proposal to tie Greece&rsquo;s future with a pledge to never default looks barmy. The euro zone already has a hard time getting Greece to reform its economy, partly because the latter can wield the threat of a messy default. When Athens reaches a primary Budget surplus, as it should this year, it will be in an even stronger negotiating position and could default on bailout loans and still pay for government expenses.

From Berlin with love

Another piece in the puzzle that is the second Greek bailout may be slotting into place. The European Central Bank has, reportedly, agreed not to demand repayment on its Greek bonds at face value. That makes sense.

The least bad option

The European Central Bank has revealed the hierarchy of bank pain in the euro zone. Just seven euro zone countries have signed up to take part in the central bank's looser collateral rules for lenders. The good news is that the ECB can now aim its cheap three-year loans at the countries where they're needed most. The bad news is that the recipients may not appreciate the exposure.

Carry on collateral

The Greek parliament has approved yet another austerity package. The governments of the euro zone and investors around the world can just about pretend that all is now well. The agreement on Greek reforms, which opens the way for a package of private creditor concessions and new public money, is supposed to bring the country&rsquo;s debt back to a sustainable level. But, this is little more than wishful thinking. European leaders are sighing with cowardly relief, hoping that they have finally insulated themselves from the Greek problem.

Not over yet

The Greek deal, hammered out in a marathon overnight negotiating session, makes the best of bad job. Of course, it would have been better to have bitten the bullet earlier by restructuring Athens&rsquo; debt sooner. And, Greece is still unlikely to pull through without further economic and political shocks. But, the debt restructuring cum euro 130-billion bailout keeps the pressure on Athens and has, probably, defused a wider blow-up.

Marathon not over

Rising Spanish yields have thrust Europe back into crisis mode. Policymakers thought the European Central Bank&rsquo;s three-year loans had bought the euro zone some time, but markets are catching up fast.

Heal thyself

How big should Europe&rsquo;s firewall be? Some analysts reckon the euro zone needs as much as euro 2 trillion, enough to bail out Italy, Spain, and some others if need be. By comparison, the size of the planned euro 500 billion of the European Stabilisation Mechanism (ESM), the euro zone&rsquo;s permanent bailout mechanism, looks paltry. Unless it includes the unused funds of the European Financial Stability Facility (EFSF), the temporary structure put in place in the wake of the Greek fiasco.

End of the bailout era

Sometimes, the world of finance is based on guesswork. Investigations into the alleged manipulation of the London interbank offered rate &mdash; known as Libor &mdash; have laid bare a flaw in the benchmark interest rate: banks can essentially make it up. That&rsquo;s unsettling, since their submissions help shape the value of some $360 trillion of loans and derivatives. A better approach would be to base Libor on real transactions.

Finger in the air

It could have been worse: That&rsquo;s the best thing to be said about the Greek debt swap. The euro zone&rsquo;s first restructuring will not be chaotic. But it has done away with the pretence that a euro zone sovereign's signature is golden. And Greece will still struggle with a heavy debt load.

End of Act 1 

In theory, this is a great time for Europe&rsquo;s nascent shadow banks. With banks in retrenchment mode and bond markets only open to large companies, there should be plenty of opportunities to lend profitably to solvent medium-sized companies. Some fund managers are indeed stepping in and raising credit funds which lend directly to companies. But these are likely to remain a niche product, particularly in Europe&rsquo;s periphery.

Out of the shadows

The European Central Bank&rsquo;s cheap money and the siren call of high yields are luring global investors into the European junk bond market. High-yield bond issuance is up nearly 70 per cent so far this year over the same period of 2011, according to Thomson Reuters data. It may seem odd given the uncertain future for the euro zone, but the ECB&rsquo;s move to flood the banking system with three-year loans has given investors confidence that a financial meltdown can be averted. The Federal Reserve&rsquo;s commitment to near-free funds is encouraging US investors to look to European debt for juicer returns. Some 63 per cent of high yield bonds sold by European companies in January were issued in dollars, according to Morgan Stanley.

Sailing into a storm

In the rising debate about what Europe could do to boost growth, a better use of the European Union structural funds has been suggested to help ease the pain of austerity. But the funds take time to work and their record is patchy so far. Even if they are put to better use, the immediate benefit would be more symbolic than economic.

Not just austerity

Euro zone banks are being rescued with IOUs rather than cash. First, Ireland&rsquo;s banks got euro 31 billion in so-called promissory notes from their government in 2010. Now Greek lenders are to receive euro 18 billion in bonds from the European Financial Stability Facility, the zone&rsquo;s bailout fund. Spain&rsquo;s BFA/Bankia group could be saved by the same fudge: It may receive euro 19 billion in the form of bonds issued by its own government.

Fudge to the rescue

Euro zone countries that receive bailouts are generally locked out of capital markets for years. Spain is hoping to break the cycle; while it may ask for up to euro 100 billion to prop up its banks, it wants to avoid a full rescue. But the deal has failed to pull Spain out of its downward spiral.

The darkest hour

Italy and France are proposing to use the euro bailout funds to buy sovereign debt in the market, in a bid to restore confidence. More likely, it would be used by creditors to dump their holdings.

If at first you don't succeed?

Euro zone leaders think they have found a bone to throw at markets at this week&rsquo;s summit. They&rsquo;re considering reviewing the senior ranking of the Euro zone bailout fund&rsquo;s loans, in the hope this will address the concerns of private creditors. Investors should be wary.

Neil Unmack