January 16, 2021

Europe Wins Modest Respite From Debt Crisis

LISBON — Europe won some further modest respite from its debt crisis Wednesday as Germany and Portugal became the latest countries to borrow with relative ease ahead of a hazard-filled few weeks for the 17-nation euro zone.

Both countries saw their borrowing costs dip at the auctions, in a further sign that investors may have temporarily put some of their concerns over Europe’s debt crisis to one side at the start of the new year. Italy and the Netherlands have also managed to sell their debt over the past week or so in a fairly trouble-free manner.

Germany, the biggest contributor in Europe’s bailouts, managed to sell €4.06 billion, or $5.3 billion, in its benchmark ten-year bonds at an average yield of 1.93 percent, down on the previous 1.98 percent it had to pay. But demand barely covered the bonds on offer.

And Portugal, which was bailed out last April after being locked out of international markets, paid a markedly lower interest rate to borrow €1 billion in three-month treasury bills.

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

Euro zone 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 also seen their borrowing costs rise ominously.

Italy, the recent focus of the crisis, must borrow to cover €53 billion in expiring debt in the first quarter alone in a series of debt auctions beginning Jan. 13. The auctions will test of 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.

Greece must also win final approval of a second, €130 billion bailout, without which it can’t pay its debts. As part of that the government must 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. Many in the markets think a bigger writedown will be needed.

At the Portuguese auction, the rate fell to an eight-month low of 4.346 percent and was sharply down from the 4.873 percent rate it had to pay in a similar auction last month. Though 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 €78 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 voiced over the amount of German bunds investors actually wanted Wednesday.

Bids for €5.14 billion worth of bonds exceeded the full amount on offer of €5 billion, but only barely, counting the €943 million 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.”

Mr. Ostwald said the low interest rate offered little attraction to typical buyers such as annuity and insurance companies, as it was too small to cover their obligations. Meanwhile, investors seeking only a safe haven were more likely to want much shorter-term issues.

“Clearly, it wasn’t the best cover, but you wouldn’t expect it to be,” he said.

Germany can borrow cheaply and for longer because its finances are among the strongest in the euro zone but concerns about the costs of bailing out other countries have raised questions about its finances too.

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 at a time of concern over the level of debts in a number of countries.

Italy, the euro zone’s third-largest economy, also sold large chunks of debt last week.

Analysts say the run of smooth auctions may be largely due to a massive €489 billion infusion of cheap, 3-year credit to euro zone 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, though Italy’s longer-term borrowing rate in the markets remain at dangerously elevated levels near 7 percent.

Article source: http://www.nytimes.com/2012/01/05/business/global/europe-wins-modest-respite-from-debt-crisis.html?partner=rss&emc=rss

Shares Suffer Again in a Blow to Market Confidence

After the rebound in the markets a day earlier when the Federal Reserve promised to keep interest rates near zero for two years, investors appeared to pay closer attention to the Fed’s grim assessment of the prospects for the economic recovery and jobs growth.

Investors fled any form of risk and poured into safe-haven investments like Treasury securities and gold, resuming the trend of the last few weeks. Confidence was shaken in the financial health of some of Europe’s banks and what their problems might mean for banks in the United States. Bank stocks led the sell-off in the United States, shedding nearly 7 percent.

Most European markets have entered bear territory, dropping more than 20 percent from recent highs, and the S. P. 500-stock index is not far behind, lopping off 18 percent since its recent April 29 peak.

Meanwhile, signs of stress are emerging in the short-term financing markets in Europe, where banks borrow billions of dollars everyday from one another and other lenders to finance loans and investments. 

Although borrowing costs for banks in the United States and Britain have  risen modestly, those for European banks that lend dollars to one another have doubled in the last 10 days to their highest level in the last two years. Still, borrowing costs are roughly one-fourth of where they were during the peak of the financial crisis.

On Wednesday, concerns about Europe’s debt crisis swirled across trading floors in New York. For yet another day, the stock market swung back and forth with ranges of hundreds of points. Stocks tried a late afternoon rally, only to plunge anew toward the close.

They finished steeply lower on Wednesday as each of the three main indexes dropped more than 4 percent, generally wiping out the gains of the previous day.

The last time there were three consecutive days of 4 percent moves in the S. P. was in October 2007.

The Standard Poor’s 500-stock index lost 4.4 percent to close at 1,120.76. The Dow Jones industrial average ended down 519.83 points, or 4.6 percent, at 10,719.94.

Few are risking a prediction that the market has hit a bottom. It will take a strong dose of rosy economic reports to start to pull stocks up. But instead of being buoyed by positive sentiments, investors are increasingly worried that governments in the United States and in Europe are unable to solve economic problems that may now be getting out of hand.

The fear is that policy makers have few weapons left to reignite growth now that United States interest rates have been pushed close to zero and any fiscal stimulus appears to be off the table in Washington.

“The market psychology is such that investors no longer seem to know who or what to root for, and all that they do know is, according to the Fed, that rates will remain low until the middle of 2013,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

As Europe’s debt crisis has spread into nations at the heart of the euro zone like Italy and France, it has added a new level of anxiety to markets. There are concerns that France could be overwhelmed if it is called upon to participate in any support for heavily indebted nations like Spain or Italy, and also bail out some of its own banks that hold large amounts of government debt from those shaky countries.

Some French bank stocks fell sharply after there were signs of some stress in bank funding rates in Europe.

Borrowing costs for European banks that lend to one another have doubled to 60 basis points since the end of July, although that is still well below the nearly 200-basis-point level hit at the height of the financial crisis.

Nevertheless, banks were the hardest hit sector in the United States stock market over fears of how vulnerable they are to the troubles in Europe.

Article source: http://feeds.nytimes.com/click.phdo?i=348a68f6672d77c3bda1255f9cfa5ce5