SALON

Wednesday, Jan 4, 2012 7:09 PM UTC

Bond Markets Give Eurozone A Brief Respite

By and

Topics: From the Wires,

Bond Markets Give Eurozone A Brief RespiteSpanish broker Cristina Garcia talks with a colleague in a trading room of a Portuguese bank, Wednesday, Jan. 4, 2012, in Lisbon. Portugal has paid a markedly lower interest rate to borrow amidst a government austerity program aimed at winning back market confidence. Portugal's government debt agency said it sold 3-month Treasury bills following a similar auction last month. (AP Photo/ Francisco Seco)(Credit: AP)

LISBON, Portugal (AP) — Europe won modest respite from its debt crisis Wednesday as Germany and Portugal borrowed with relative ease ahead of a hazard-filled few weeks for the 17 nations that use the euro.

But Greece’s new prime minister warned that his debt-crippled country has only three months to come up with new reforms so his country can stay in the eurozone and avoid a potential default — a reminder of how the crisis can flare up at any time. And the news that a major Italian bank had to offer an unexpectedly large discount to raise new capital showed just how wary investors are of Europe’s shaky banks.

So far this year, markets have pushed concerns about Europe to one side, especially as countries have managed to raise the money they need.

Germany, the biggest contributor in Europe’s bailouts, managed to sell euro4.06 billion ($5.3 billion) in its benchmark ten-year bonds Wednesday at an average yield of 1.93 percent, down on the previous 1.98 percent it had to pay. And Portugal, which was bailed out last April, paid a markedly lower interest rate to borrow euro1 billion ($1.3 billion) in three-month treasury bills.

But Italian bank UniCredit saw its share price tumble over 10 percent on the news it was selling new shares at a large 69 percent discount to Tuesday’s closing price. UniCredit is trying to raise euro7.5 billion ($9.8 billion) to meet new European requirements for banks to thicken their financial cushions against possible losses.

Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy. That’s why the regulatory authorities want Europe’s banks to raise their buffers by euro115 billion ($150 billion) over the next few months.

The German and Portuguese auctions come ahead of severe tests for eurozone leaders as they try to navigate their way out of a crisis over too much debt in some countries.

Eurozone governments are struggling to convince financial markets that indebted governments will not default and should be able to borrow at affordable rates to repay debts as they come due. Greece, Ireland and Portugal have needed bailouts, while much larger Italy and Spain have seen their borrowing costs rise ominously.

Italy, the recent focus of the crisis, must borrow to cover euro53 billion ($69 billion) in expiring debt in the first quarter alone in debt auctions beginning Jan. 13. That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.

Further trouble could come from a slowing eurozone economy that may already have shrunk in the fourth quarter.

Additionally, Greece must also win approval of a second, euro130 billion ($169 billion) bailout, without which it can’t pay its debts, and strike a deal with creditors for a 50 percent reduction in their holdings of Greek debt to try to put the country back on its feet.

Greek Prime Minister Lucas Papademos warned union leaders and business groups Wednesday that decisions made in the next few weeks, ahead of a new visit by international debt inspectors, will determine whether Greece remains in the 17-nation eurozone or reverts to its pre-2002 currency, the drachma.

Portugal looks like it’s in better shape at the moment. The rate it had to pay at its auction fell to an eight-month low of 4.346 percent. Although Portugal cannot tap long-term bond markets at a reasonable price, it has sought to maintain a market presence by issuing shorter-term debt.

Analysts said the improvement may represent a sign that Portugal is regaining the markets’ confidence as it carries out spending cuts and revenue increases in return for its euro78 billion ($102 billion) bailout.

“There’s been an improvement in the risk perception of Portuguese debt, which has driven rates down” said Filipe Silva, debt manager at Portuguese financial group Banco Carregosa. “Now we just need to see whether it holds.”

Germany’s auction was better than one in November which raised fears that Europe’s debt crisis was spiraling out of control when the government sold only 65 percent of debt on offer.

Still, there was some concern over the amount of German bunds investors actually wanted Wednesday. Bids for euro5.14 billion ($6.7 billion) worth of bonds exceeded the full amount on offer of euro5 billion ($6.5 billion), but only barely, counting euro943 million ($1.23 billion) the government kept back for secondary market operations.

“Yes, it was covered, so that’s a relief,” said Marc Ostwald, a markets strategist at Monument Securities. “On the other hand, the coverage was poor.”

Germany can borrow cheaply because its economy is the strongest in the eurozone but concerns about the costs of bailing out fellow eurozone nations have raised questions about Germany’s finances as well.

Wednesday’s auction results follow a recent trend. On Tuesday, the Netherlands saw its borrowing rates fell to near zero percent in a pair of short-term auctions, in a sign that investors are searching out what they consider to be Europe’s safer assets.

Italy also sold large chunks of debt last week and analysts say the run of smooth auctions may be largely due to a massive euro489 billion ($636 billion) infusion of cheap, 3-year credit to eurozone banks by the European Central Bank.

Some of that cheap money may be being used by some banks to buy higher-yielding short-term debt. Italy’s longer-term borrowing rate in the markets remain at dangerously elevated levels near 7 percent, a point that prompted Greece, Ireland and Portugal to seek bailouts.

___

McHugh contributed from Frankfurt, Germany. Frances D’Emilio in Rome contributed too.

More Barry Hatton.

More David Mchugh.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments are not enabled for this story.

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
Loaded terminology like "entitlements" and "welfare" skews the debate and alters America. How right-wingers use semantic tricks to kill government.
349 points350 points | 116 comments
vote
How right-wingers use semantic tricks to kill government -- "...much of the U.S. economic security support system consists of subsidies for the affluent in the form of tax breaks, like those for private retirement savings plans such as 401(k)s and private employer-provided health insurance."
65 points66 points | 3 comments
vote
Doug Henwood: Capitalism Thrives on Class Exploitation
38 points39 points | 4 comments
vote
Jon Karl makes things worse: He regrets “inaccurate” Benghazi email but says his story based on it “still entirely stands.” Really. ABC News?
37 points38 points | 12 comments
vote
FBI reportedly joins Bachmann campaign finance probe
39 points40 points | comment

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations