French Debt Costs Rise at Bond Sale as AAA Decision Looms
France Takes Market Pulse at Bond Sale as AAA Decision Looms
Antoine Antoniol/Bloomberg
A relief by sculptor Albert Carrier-Belleuse hangs over the entrance to the Banque de France in Paris.
A relief by sculptor Albert Carrier-Belleuse hangs over the entrance to the Banque de France in Paris. Photographer: Antoine Antoniol/Bloomberg
Dec. 1 (Bloomberg) -- David Riley, head of global sovereign ratings at Fitch Ratings Ltd., discusses the outlook for French bonds, the U.S. economy and efforts to resolve the euro-zone crisis. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Spain, France Sales Take on Crisis as Firewall Eludes EU
Antoine Antoniol/Bloomberg
A European Union (EU) flag, left, and French national flag fly outside the Banque de France in Paris. France, rated AAA, is auctioning as much as 4.5 billion euros of debt as its 10-year securities yielded 112 basis points more than comparable German debt.
A European Union (EU) flag, left, and French national flag fly outside the Banque de France in Paris. France, rated AAA, is auctioning as much as 4.5 billion euros of debt as its 10-year securities yielded 112 basis points more than comparable German debt. Photographer: Antoine Antoniol/Bloomberg
Spain, France Bond Sales Take on Crisis
Denis Doyle/Bloomberg
Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions.
Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions. Photographer: Denis Doyle/Bloomberg
France sold 7.96 billion euros ($10.2 billion) of debt, with 10-year borrowing costs rising in the country’s first bond auction of the year as credit-rating companies threaten to cut the nation’s AAA grade.
The government sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent, from 3.18 percent on Dec. 1. The euro fell to its weakest level against the dollar in 15 months, and the extra yield investors demand to hold French 10-year bonds instead of benchmark German bunds widened to the most in about six weeks.
“There’s still the threat of a downgrade hanging over France and until we get that situation cleared up you can’t signal the all-clear,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London.
France has the biggest debt burden of the six top-rated euro nations, at 85 percent of gross domestic product. Its 10- year yield spread to German debt widened to a 21-year high of 204 basis points on Nov. 17 amid concern Europe will struggle to contain the region’s debt crisis. Today, it reached 151 basis points, or 1.51 percentage points, the most since Nov. 25. It was at 149 basis points at 5:39 p.m. Paris time compared with a premium of 47 basis points for AAA rated Finland and 39 basis points for the Netherlands.
The 17-nation common currency fell as much as 1.3 percent to $1.2780 as the region’s rescue fund boosted the extra yield it offers over the benchmark rate to sell three-year notes.
Other Sales
Hungary, meanwhile, raised less than planned at a Treasury bill auction, pushing the forint to a record low. European stocks fell for a second day as UniCredit SpA led banks lower on concern more lenders may be forced to raise capital.
France, which also auctioned 2023, 2035 and 2041 securities, had aimed to sell a maximum of 8 billion euros. The bid-to-cover ratio, or the number of bids for each unit of debt sold, for the 10-year-bond fell to 1.64 from 3.05 on Dec. 1. The nation drew bids for 1.82 times the 2.17 billion euros of 2041 bonds sold, and had bid-to-cover ratios of 3.22 and 2.02 for the 2023 and 2035 securities respectively.
“This is proving to the market again that they can still raise finance without too many difficulties,” said Wand.
The French sale came a day after Germany sold 4.1 billion euros of bonds, getting more bids than its maximum target of 5 billion euros. The rush for funding may determine whether euro- area leaders can save the 13-year-old single currency. Italy and Spain are among countries that in the coming weeks will sell debt that may reach 262 billion euros in the first quarter, according to Deutsche Bank AG forecasts.
Sarkozy Efforts
“It’s the first French auction of the year and it has broadly gone as expected,” said Peter Goves, a fixed-income strategist at Citigroup Inc. in London. “Where France is trading, a lot of negatives are in the price, especially downgrade concerns. Spanish and Italian sales will be more of a litmus test for the market.”
The yield on five-year Spanish notes jumped 25 basis points today to 4.73 percent after the government said it will sell a new three-year benchmark security and 2016 debt on Jan. 12.
Today’s sale by the French debt-management body, Agence France Tresor, comes as President Nicolas Sarkozy -- who faces re-election in about four months -- seeks to protect France’s creditworthiness with tax increases and spending cuts.
France has also shrunk its 2012 bond-sale plan, with AFT saying last month it needs 177.9 billion euros in financing this year, down from the 182 billion euros estimated on Sept. 28.
Low Cost
French 10-year bonds fell for a seventh-straight day today, with the yield climbing as high as 3.38 percent, the most since Dec. 9. It reached a peak last year of 3.82 percent on Nov. 17 and fell to a low of 2.44 percent on Sept. 12.
The average financing costs of medium and long-term French debt remains low. Last year, it was 2.8 percent, the second- lowest since the creation of the euro, after the 2.53 percent in 2010, according to AFT. The bid-to-cover ratio at auctions last year was 2.4, up from 2.1 in 2010.
Ratings companies Standard & Poor’s and Moody’s Investors Service are reviewing the sovereign credit grade of Europe’s second-largest economy, while Fitch Ratings cut France’s credit outlook on Dec. 16 on the “heightened risk of contingent liabilities” from the euro-region crisis.
S&P placed the ratings of 15 euro nations, including AAA rated Germany and France, on review for possible downgrades on Dec. 5, saying it may cut the French grade by as many as two steps. Moody’s said Dec. 12 it will review the ratings of all EU countries after a summit on Dec. 9 in Brussels failed to produce “decisive policy measures” to end the region’s debt turmoil.
Slowing Economy
Euro-area leaders are struggling to solve the region’s sovereign debt crisis that is now in its third year. The push continues with a Jan. 9 meeting between Sarkozy and German Chancellor Angela Merkel in Berlin. Euro area finance chiefs convene in Brussels on Jan. 23, with government leaders gathering a week later.
France’s woes, like those of other euro-area countries, are compounded by an economy that’s edging toward recession as budget cuts to contain the fiscal crisis bite.
The French economy is probably already in a recession that will last through March, national statistics office Insee said last month. The European Commission reduced the region’s 2012 growth forecast by more than half to 0.5 percent in November. The euro has for the first time in a decade recorded two consecutive annual losses against the dollar.
After Italy, it has the most amount of debt coming due this year in Europe at $367 billion, followed by Germany at $285 billion, according to data compiled by Bloomberg.
Government Borrowings
Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.
Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to the data.
France’s financial institutions also have the largest debt holdings in the five crisis-hit countries -- Greece, Portugal, Ireland, Italy and Spain -- at $681 billion as of June, according to data from the Bank for International Settlements in Basel, Switzerland.
European banks have about $665 billion of debt coming due in the first six months, according to Citigroup Inc., based on Dealogic data.
To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net
To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net Daniel Tilles at dtilles@bloomberg.net
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