Bond market gives eurozone brief respite

Broker Luis Gouveia reacts in a trading room of a Portuguese bank.

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

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 in the wake of fairly-buoyant U.S. economic data. 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 euros ($5.3 billion) in its benchmark 10-year bonds Wednesday 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 euros ($1.3 billion) in three-month treasury bills.

The German and Portuguese auctions come ahead of severe tests for eurozone leaders as they try to navigate their way out of their 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 also seen their borrowing costs rise ominously.

Italy, the recent focus of the crisis, must borrow to cover 53 billion euros ($69 billion) in expiring debt in the first quarter alone in a series of debt auctions beginning Jan. 13. The auctions 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. Many economists predict an outright recession, which would be two quarters of negative growth.

Germany’s DIW economic institute became the latest Wednesday to lower its 2012 growth estimate for Europe’s largest economy to 0.6 percent from 1 percent as trouble in other eurozone countries reduces the country’s exports to them.

Greece must also win final approval of a second, 130 billion euro 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 write-down 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 euro ($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 voiced over the amount of German bunds investors actually wanted Wednesday.

Bids for 5.14 billion euros ($6.7 billion) worth of bonds exceeded the full amount on offer of 5 billion euros ($6.5 billion), but only barely, counting the 943 million euros ($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.”

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 eurozone but concerns about the costs of bailing out other countries have raised questions about its finances too.

Wednesday’s auction results follow a recent trend somewhat. The Netherlands saw its borrowing rates fall Tuesday to near 0 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 eurozone’s third-largest economy, also sold large chunks of debt last week and analysts say the run of smooth auctions may be largely due to a massive 489 billion euro ($636 billion) infusion of cheap, three-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, though Italy’s longer-term borrowing rate in the markets remain at dangerously elevated levels near 7 percent.

A version of this article appeared in the print edition of The Daily Star on January 05, 2012, on page 5.




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