Sovereign debt spooks investors, so a major bank walks away

Sovereign debt? Less of a problem for us, says the investment bank Jefferies Group as it reduces its holdings in sovereign debt from five European countries.

Gregorio Borgia/AP/FILE
Italian Prime Minister Silvio Berlusconi sits in the lower chamber of Parliament to attend a confidence vote, in Rome, Friday, Oct. 14. Berlusconi says his decision to resign after parliament passed economic reforms is for the good of the country, and to settle financial markets that have lost confidence in Italy's ability to rein in debt and spur growth.

Investment bank Jefferies Group Inc., which has seen shares fall as investors worried about its exposure to European debt, said Monday it has reduced holdings in sovereign debt of Portugal, Italy, Ireland, Greece, and Spain.
Shares have gradually declined in the past few months and are off about 54 percent since the beginning of the year. They fell 20 percent last Thursday to the lowest point since March 2009. That decline was in part due to last Monday's collapse of broker MF Global Holdings Ltd.

MF Global's $6 billion bet on European government bonds spooked investors and culminated in the securities firm filing for Chapter 11 bankruptcy protection. Traders began to questioning Jefferies' holdings of debt issued by countries at the center of the European debt crisis

On Monday Jefferies shares rose 20 cents, or 1.7 percent, to $12.27. They have traded as high as $27.12 in the past 52 weeks.
The New York company announced it cut its securities holdings in the five nations by $1.1 billion long and $1.1 billion short. That was a 49.5 percent reduction in Jefferies' gross holdings of the securities since the close of business Friday. The company said the transactions resulted in no meaningful profit or loss on Monday's trading activity or its remaining positions. Jefferies' net exposure to the sovereign securities is $59 million, or 1.7 percent of shareholder equity, with negligible market or credit risk, it said.
"We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book," said Richard Handler, chairman and CEO, and Brian Friedman, chairman of the executive committee of Jefferies, in a joint statement. "We will now resume our normal market-making activities and serve our clients around the world."

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