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

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

The push to solve the debt crisis now in its third yearcontinues with a Jan. 9 Franco-German summit in Berlin. EuropeanUnion finance chiefs convene in Brussels on Jan. 23, withgovernment leaders gathering a week later. Greece, meantime, isstill seeking final agreement to write off at least half of itsdebts 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 numberof decisions to be made and a number of implementations that needto be successfully concluded. The most pressing one will be theGreek PSI. Implementation is one of the key words for the firstquarter, and refinancing is the other.”

The European woes are compounded by an economy that's edgingtoward recession as governments toughen budget cuts to contain thefiscal crisis, undermining consumer demand. The European Commissionreduced its 2012 growth forecast by more than half to 0.5 percentin November. The euro has for the first time recorded twoconsecutive annual losses against the dollar.

“The solution to the euro-area's problems is a long, drawn-outprocess, as it involves structural reforms and fiscalconsolidation,” said Mohit Kumar, head of European interest- ratestrategy at Deutsche Bank in London. “Leaders will strive to movetoward that road, but given the varying political and economicinterests, it will be an uncertain road.”

Euro countries face stiff competition for investors asgovernments of the world's leading economies have more than $7.6trillion 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 ofSeven nations plus Brazil, Russia, India and China is up from $7.4trillion a year ago, according to data compiled by Bloomberg.

Short-Term Funds

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

Germany got bids for 5.14 billion euros of 10-year bunds at itsauction, more than the maximum sales target of 5 billion euros, theBundesbank said. The debt agency accepted bids for 4.06 billioneuros at an average yield of 1.93 percent. Portugal's three-monthborrowing cost declined to 4.346 percent at today's sale, down from4.873 percent at a Dec. 7 auction.

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

The yield premium investors demand to lend to Italy rather thanGermany for a decade is about 500 basis points, almost five timesthe five-year average, though two-year yields have dropped to about4.66 percent from above 7.6 percent in November. Spanish two-yearyields are 3.52 percent, after surpassing 6 percent on Nov. 25.

Spain and Italy have benefited from the support of the EuropeanCentral Bank, which began buying government bonds in May and haspurchased 211.5 billion euros of the securities so far. The ECBalso loaned banks a record 489 billion euros for three years onDec. 21 to avert a credit crunch sparked by the debt crisis.

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

Among the risks facing the euro-area bond issuers this quarteris the “heavy auction calendar” for sovereign bonds, RBS's Matthewssaid in a toe to clients

“There's a debate out there to what extent the ECB operationswill support sovereign bond markets,” he wrote. “It's veryimportant to help stabilize the situation.”

On the political side, leaders must complete a second bailoutfor 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. Theregion's finance ministers plan to meet four times in the firstquarter, 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 yesterdaythat private-sector involvement in the Greek plan must be concludedbefore governments can sign off.

Greece's creditors are resisting pressure from the InternationalMonetary Fund to accept bigger losses, three people with directknowledge of the discussions said last month. Lenders want the 70billion euros of new bonds the government will issue in return forexisting securities to carry a coupon of about 5 percent, said thepeople, who declined to be identified because the negotiations areprivate.

Germany is studying a proposal to write down 75 percent of Greekgovernment bonds held by private creditors as part of a planneddebt swap to ensure greater debt sustainability, Greek news websiteEuro2day.gr reported on Jan. 2, without citing anyone. The Germangovernment declined to comment on the report.

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