European nations including Italy, Belgium and Spain may sell more than 33 billion euros ($43.3 billion) of securities this week as credit-rating cuts risk upending optimism the region’s debt crisis is being contained.
Italy sold 5.574 billion euros out of a target of 6 billion euros of five- and 10-year debt today, and issued 1.9 billion euros out of a maximum goal of 2 billion euros of securities due in April 2016 and March 2021. Belgium sells as much as 3 billion euros of bills tomorrow, with Spain, Portugal, Germany and France issuing 13 different maturities in the five days.
While Italian and Spanish 10-year yields have fallen more than 1 percentage point from November highs as the European Central Bank offered banks unlimited three-year loans and Greek debt-swap talks pressed on, Fitch Ratings joined Standard & Poor’s this month in downgrading the nations’ credit. European Union leaders are meeting today in Brussels in a bid to wrap up a deficit-control treaty aimed at stemming the crisis, now in its third year.
“It wasn’t an easy-going exercise for Italy,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “That’s obviously not a comforting sign going forward. Having the Italian experience rather fresh in people’s minds, it will be interesting to see how the market will be able to make room for the upcoming supply.”
Italy sold 8 billion euros of 182-day bills on Jan. 27 at 1.969 percent, the least since May and down from 3.251 percent at an auction of similar securities on Dec. 28. Borrowing costs fell to the lowest since March at a Spanish sale of three-month debt on Jan. 24. The week before, it sold 6.61 billion euros of bonds, versus a maximum target of 4.5 billion euros.
Spain sells notes due in July 2015, October 2016 and January 2017 on Feb. 2. The nation’s bonds have returned 2.5 percent this month, including reinvested interest, extending a 6.9 percent increase in December, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian debt earned 5.8 percent in 2012, the second most among 26 bond market indexes.
“The next test will certainly be Spain,” said Schnautz. “To their advantage, they will only have short-end paper, up to five years.”
The yield on the Spanish 10-year bond fell 24 basis points to 4.97 percent on Jan. 27, with the two-year note yield dropping for the sixth consecutive day. The 10-year Italian yield was 15 basis points lower at 5.90 percent, with the short- dated yield tumbling for the fourth successive week.
The Italian 10-year yield jumped 20 basis points to 6.09 percent at the close in London today, with the equivalent Spanish yield 8 basis points higher at 5.04 percent.
The ECB reduced its main interest rate twice last quarter, to 1 percent from 1.5 percent. It followed those by allotting 489 billion euros of three-year loans to euro-area lenders in December to ward off a funding squeeze. The central bank will offer funds at that maturity again on Feb. 28.
Fitch said on Jan. 27 that the five nations it downgraded lack financing flexibility in the face of the debt crisis. Italy, the euro area’s third-largest economy, was cut two levels to A- from A+. The rating on Spain was also lowered two grades, to A from AA-. Ratings on Belgium, Slovenia and Cyprus were also reduced, while Ireland’s rating was maintained.
“The divergence in monetary and credit conditions across the euro zone and near-term economic outlook highlight the greater vulnerability” these nations face in the event of financing shocks, Fitch said. “These sovereigns do not, in Fitch’s view, accrue the full benefits of the euro’s reserve- currency status.”
Italy’s credit rating was cut two levels to BBB+ on Jan. 13 by S&P, which also downgraded eight other euro-region nations including France and Austria, citing European leaders’ inability to end the debt crisis.
“We have seen some improvement in market sentiment and then this happened,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank in New York. “But I don’t think these moves will drive the market to a new level given Fitch is catching up with other agencies.”
The fallout in financial markets to S&P’s action was muted. Spain on Jan. 17 paid an average 2.049 percent to sell 12-month debt, compared with 4.05 percent on Dec. 13. The previous day, France auctioned 1.895 billion euros of one-year notes at a yield of 0.406 percent, down from 0.454 percent on Jan. 9.
Belgium, which was cut to AA from AA+ by Fitch, auctions 1.8 billion euros of 105-day and 1.2 billion euros of 168-day debt. The nation’s borrowing costs for one-year securities slid to a five-month low on Jan. 17, when it sold 2.96 billion euros of 91- and 364-day bills.
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 last year, according to data compiled by Bloomberg as of December. At about $428 billion, Italy has the most coming due this year in the euro region, followed by France at $367 billion and Germany at $285 billion, year-end data show.
Greece and its private creditors said they’re making progress on a debt-swap accord after bondholders signaled they would accept European government demands for lower interest rates. Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.
The sides are “close” to completing a voluntary exchange within a framework outlined by Luxembourg Prime Minister Jean- Claude Juncker, the Institute of International Finance, negotiating on behalf of private creditors, said in an e-mailed statement in Athens on Jan. 28.
The nation must repay 14.5 billion euros of bonds in March and an agreement that triggers as much as $3.2 billion of default insurance may be necessary unless all bondholders approve, according to Marco Buti, head of the European Commission’s economics division.
Germany sells as much as 5 billion euros of 10-year bunds on Feb. 1, with France auctioning debt maturing in October 2018, October 2020 and April 2022 a day later. France also issued 8.31 billion euros of bills today.
This week’s supply may attract demand as liquidity will be abundant, Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, wrote in an e-mailed report dated Jan. 27. Italy will pay back 26 billion euros of a 5 percent security on Feb. 1, while coupon payments from Italy and Spain totaling 16 billion euros will lend additional support, she wrote.
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