Eurozone risk rough water to sell debt bonds

Eurozone risk rough water to sell debt bonds

27th September 2010, Comments 0 comments

Economies in eurozones like Spain are springing forward with plans to sell debt bonds.

Paris -- Some precarious eurozone economies, shut out from the bond markets earlier this year by prohibitively high yields, returned in buoyant form this month with successful operations to sell debt bonds.

Countries such as Spain, Italy and Portugal all had successful bond issues, and some major institutional investors which had interrupted their bond purchase earlier this year have been taking part.

An aversion to risks on the stock market, as well as the helping hand of the European Central Bank and greater confidence that governments will step in to prevent any eurozone defaults, are helping to fuel the rally, experts said.

"Every time a peripheral eurozone country issues a bond it goes through no problem," said Jean-Francois Robin, an analyst for Natixis, a French bank.

Frederic Gabizon, a debt analyst at British lender HSBC, said: "This is a favourable environment for sovereign debt in general, compared to stocks."

However, perceptions of risk on eurozone debt markets are strongly skewed by two special measures introduced as a result of the Greek debt crisis earlier this year.

The European Central Bank, in a stunning switch of attitude, agreed to stand by to buy some eurozone sovereign bonds from the balance sheets of financial institutions having trouble raising funds.

And European Union countries and the International Monetary Fund provided guarantees of EUR 750 billion to help a member country in trouble or under pressure on the bond market.

Eurozone countries as a whole are well ahead in their debt placement plans for the year, having raised more than 80 percent of their 2010 requirements.

Analysts are quick to warn however that the climate remains uneasy after some of the most agitated months ever seen on the bond markets, resulting in an unprecedented crisis for the eurozone.

This point was made in strong terms by credit ratings agency Fitch in a study published this week.

Fitch warned that competition between eurozone governments and banks for funds raised on financial markets is likely to intensify in the coming months.

The agency said that the stepped-up pace would come “…as higher gross fiscal financing needs coincide with an upsurge,” in bank debt maturities in 2011.

States and banks are expected to seek EUR 455 billion from investors in the second half of this year and between EUR 900 billion and one trillion a year in 2011 and 2012, according to Fitch.

Fitch also forecast that most of the 16 eurozone members would need three to four years to stabilise their debt levels.

The agency found that market confidence in the eurozone remained fragile despite the outcome of so-called "stress tests” on European banks, generally considered to have been reassuring.

Gabizon also remarked, “There is still... some volatility. Every news report is an excuse for going in one sense or the other.”

And it remains to be seen whether confidence will be dented if the ECB winds down its exceptional programme of government bond purchases launched in May.

ECB bond purchases went down to just EUR 9 million euros in one week in August but are now up again at EUR 173 million last week.

That pales in comparison to the EUR 16.5 billion in bonds it bought in the first week of the programme to prevent a collapse of the bond markets but still indicates a resurgence of investor concern about sovereign debt.

One of the main drivers of concern among investors is the state of the banking system, which in turn could add to strains on national finances. A report in the Wall Street Journal this week questioning stress tests on European banks dented financial markets.

Responding to these worries, the ECB last week said that it would continue to provide exceptional funding for banks for the rest of the year.

"We're at a crucial moment of concern about the economy," Robin said, pointing to worries over growth in Europe and the US.

Gabizon said, “Are things going well? I don't know. But even though it's volatile it's going better than a few months ago.”

Thomas Urbain / AFP / Expatica

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