March 2, 2021

Italian Bond Sale Gets Tepid Response as Debt Crisis Festers

Amid a growing sense that Europe’s response to the debt crisis lacks coordination and conviction, the United States Treasury Secretary Timothy Geithner will make a rare if not unprecedented appearance at a meeting of European finance ministers, to be held Friday in Wroclaw, Poland. The trip will be his second across the Atlantic in a week, following the Group of 7 session in France last weekend.

“Clearly the U.S. Treasury is disappointed with the direction of the European debt crisis and is looking for action, before further sections of the banking system are drawn in and a global financial crisis is re-visited,” Chris Turner and Tom Levinson, strategists at ING, said in a research note.

President Barack Obama, in a meeting with Spanish-speaking journalists in Washington, reportedly called on euro-zone leaders to show markets that they are taking responsibility for its debt crisis.

“In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy,” EFE, a Spanish news agency, quoted Mr. Obama as saying.

The German chancellor Angela Merkel, meanwhile, sought to dampen fears surrounding Greece — where the debt crisis began and which is having trouble meeting the conditions for its second bailout.

“The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Mrs. Merkel said in a radio interview, according to Bloomberg News. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”

While the immediate problems revolve around Greece, much-bigger countries like Italy, which is equally overstretched, have been losing market confidence as well, creating even greater worries.

On Tuesday, the Italian Treasury sold €3.9 billion, or $5.3 billion, of a new 5-year bond at an average yield of 5.6 percent. That compared to a rate of 4.93 percent the last time securities of a similar maturity were sold on July 14. Demand at the auction was 1.28 times the amount on offer, compared with 1.93 times at the last sale.

Analysts said demand was disappointing and that the European Central Bank had been seen by traders to be buying Italian bonds around the auction as part of their program of asset purchases to stable volatile markets.

The yield on 10-year Italian bonds was around 5.7 percent on Tuesday, again approaching the 6 percent level that is considered to be unsustainable — and that prompted the E.C.B. to intervene and start buying Italian and Spanish debt on Aug. 8. Spanish bonds were trading at around 5.3 percent.

Greece’s 10-year bond yields rose 48 basis points to 24.03 percent, after earlier climbing to a euro-era record of 25 percent as concerns about a near-term Greek default increased

European stocks declined, but were off their early lows, as French banks were again punished by investors amid concerns about their exposure to high-yield European debt and ability to finance themselves in dollars. U.S. futures dropped, while Asian shares were little changed.

At midday, the Euro Stoxx 50 slid 1.4 percent and the CAC-40 shed 2 percent in Paris.

Reports of a meeting last week in Rome between Finance Minister Giulio Tremonti and the chairman of China Investment Corp., Lou Jiwei, were confirmed by Mr. Tremonti’s office on Tuesday, news agencies reported.

Citing unnamed Italian officials, media reports have suggested that the Italian government was preparing additional measures to cut debt and that the country was discussing sales of its debt to cash-rich China.

Those reports were greeted with skepticism by analysts, who have seen Italy announce new measures — and then apparently backslide on them — over the summer. China’s purchase of bonds during the crisis from other euro-area countries like Spain and Portugal also had limited effects.

“Purchases of Italian bonds or other Italian assets by China’s sovereign wealth fund would buy Italy some time, but that is all,” Robert O’Daly, economist at The Economist Intelligence Unit, said. “As seen with the E.C.B.’s purchases of €40 billion to €45 billion worth of Italian government bonds in August the effect was temporary.”

He said that to restore confidence the Italian government would “have to put aside its internal wrangling to implement the program of fiscal austerity presented to Parliament on September 1st and at the same time come up with a coherent medium-term strategy to improve the country’s dismal economic growth performance.”

But he added that “does not seem likely to happen” given the differences within the ruling coalition.

Article source:

Speak Your Mind