Refinancing to Dominate Euro Crisis

Heavy schedule of sovereign debt issuance seen in coming months.

Germany sold 4.1 billion euros ($5.3 billion) of bonds today, kicking off a competition for finance that may determine whether euro-area leaders can preserve the 13-year-old single currency.

Portugal, forced to seek an EU-led rescue in May, borrowed 1 billion euros selling bills repayable in April. Auctions from Greece, Italy and Spain follow later in the month as common currency members commence sales that may reach 262 billion euros in the first quarter and 865 billion euros in 2012, according to Deutsche Bank AG forecasts. Italy’s 10-year borrowing cost is 6.95 percent, up from a 2011 average of 5.35 percent, while Spain’s 5.42 percent is down from 5.44 percent last year.

The push to solve the debt crisis now in its third year continues with a Jan. 9 Franco-German summit in Berlin. European Union finance chiefs convene in Brussels on Jan. 23, with government leaders gathering a week later. Greece, meantime, is still seeking final agreement to write off at least half of its debts in a so-called private-sector involvement agreement.

“This will definitely be a challenging quarter,” Nick Matthews, a senior economist at Royal Bank of Scotland Group Plc in London, said by e-mail. “There are a lot of political meetings and a number of decisions to be made and a number of implementations that need to be successfully concluded. The most pressing one will be the Greek PSI. Implementation is one of the key words for the first quarter, and refinancing is the other.”

The European woes are compounded by an economy that’s edging toward recession as governments toughen budget cuts to contain the fiscal crisis, undermining consumer demand. The European Commission reduced its 2012 growth forecast by more than half to 0.5 percent in November. The euro has for the first time recorded two consecutive annual losses against the dollar.

“The solution to the euro-area’s problems is a long, drawn-out process, as it involves structural reforms and fiscal consolidation,” said Mohit Kumar, head of European interest- rate strategy at Deutsche Bank in London. “Leaders will strive to move toward that road, but given the varying political and economic interests, it will be an uncertain road.”

Euro countries face stiff competition for investors as governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year. Led by Japan’s $3 trillion and $2.8 trillion for the U.S., the amount coming due for the Group of Seven nations plus Brazil, Russia, India and China is up from $7.4 trillion a year ago, according to data compiled by Bloomberg.


Short-Term Funds

Bill auctions saw Belgium sell almost 2.4 billion euros of three- and six-month treasury bills yesterday at its lowest borrowing costs in 18 months. In the Netherlands, 2.99 billion euros of 85-day bills were sold at a yield of zero, while France sold 8.7 billion euros of bills at yields ranging from 0.023 percent for 84-day securities to 0.136 percent for 315-day debt.

Germany got bids for 5.14 billion euros of 10-year bunds at its auction, more than the maximum sales target of 5 billion euros, the Bundesbank said. The debt agency accepted bids for 4.06 billion euros at an average yield of 1.93 percent. Portugal’s three-month borrowing cost declined to 4.346 percent at today’s sale, down from 4.873 percent at a Dec. 7 auction.

Longer-term borrowing remains out of reach for Greece, Ireland and Portugal, the three euro states that received rescue packages after 10-year yields topped 7 percent.

The yield premium investors demand to lend to Italy rather than Germany for a decade is about 500 basis points, almost five times the five-year average, though two-year yields have dropped to about 4.66 percent from above 7.6 percent in November. Spanish two-year yields are 3.52 percent, after surpassing 6 percent on Nov. 25.

Spain and Italy have benefited from the support of the European Central Bank, which began buying government bonds in May and has purchased 211.5 billion euros of the securities so far. The ECB also loaned banks a record 489 billion euros for three years on Dec. 21 to avert a credit crunch sparked by the debt crisis.

“We require a bridge to support the markets and that has to come from the ECB,” said Kumar at Deutsche Bank.

Among the risks facing the euro-area bond issuers this quarter is the “heavy auction calendar” for sovereign bonds, RBS’s Matthews said in a toe to clients

“There’s a debate out there to what extent the ECB operations will support sovereign bond markets,” he wrote. “It’s very important to help stabilize the situation.”

On the political side, leaders must complete a second bailout for Greece, which includes 130 billion euros of public funds, before the country redeems 14.4 billion euros of bonds on March 20. EU leaders have scheduled another summit for March 1- 2. The region’s finance ministers plan to meet four times in the first quarter, ending with an informal session in Copenhagen on March 30. Denmark holds the six-month rotating EU presidency.


Greek Writedowns

The European Commission, the EU’s executive arm, said yesterday that private-sector involvement in the Greek plan must be concluded before governments can sign off.

Greece’s creditors are resisting pressure from the International Monetary Fund to accept bigger losses, three people with direct knowledge of the discussions said last month. Lenders want the 70 billion euros of new bonds the government will issue in return for existing securities to carry a coupon of about 5 percent, said the people, who declined to be identified because the negotiations are private.

Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website reported on Jan. 2, without citing anyone. The German government declined to comment on the report.


Bloomberg News


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