Italy’s Borrowing Costs Decline at Auction After Government Agrees on Cuts

Dec. 28 (Bloomberg) --Italy sold 9 billion euros ($11.8 billion) of six-month Treasury bills, meeting its target, and borrowing costs plunged after the European Central Bank provided euro-region lenders with unlimited three-year loans last week. 

The Rome-based Treasury sold the 179-day bills at a rate of 3.251 percent, down from a 14-year-high of 6.504 percent at the last auction of similar-maturity securities on Nov. 25. Investors bid for 1.7 times the amount offered, up from 1.5 times last month. 

Demand “was quite good, a sign that market tensions have considerably eased from a month ago and that ECB liquidity may be working to support demand,” Luca Cazzulani, a senior fixed- income strategist at UniCredit Global Research in Milan, said in a note published today. 

The auction was Italy’s first since the ECB offered 489 billion euros in loans to European banks last week in a bid to avoid a credit crunch. Italian lenders borrowed 116 billion euros as part of the tender on Dec. 21, according to a person with direct knowledge of the loans. A bigger test of the ECB lending on demand for European bonds comes tomorrow when Italy sells as much as 8.5 billion euros of longer-maturity debt.

Bonds Gain

Italian 10-year bonds rose for the first time in five days after the auction on bets the ECB loans are boosting demand for the nation’s debt. The yield on the country’s 10-year bond fell 22 basis point to 6.77 percent at 12:56 p.m. in Rome, narrowing the difference with Germany to 484 basis points from 508 basis points yesterday. 

The Treasury also auctioned 1.7 billion euros today of zero-coupon notes due 2013, short of the maximum target, at 4.853 percent. The treasury sold the debt at 4.853 percent, down from 7.814 percent on Nov. 25. 

“This may be seen by some as an indication that ‘maturity matters’ in Italian paper, with the credit risk associated with longer maturities warranting compensation,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. Today’s “overall positive results, means that tomorrow “the risks of a bad auction may be limited.”

Budget Plan

Italian Prime Minister Mario Monti secured final approval in Parliament last week for a 30 billion-euro budget plan aimed at raising revenue and boosting economic growth as he tries to persuade investors Italy can tame the country’s 1.9 trillion- euro debt and avoid a bailout. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may deepen the country’s recession and until today had done little to bring down borrowing costs. 

Monti’s budget plan risks deepening the country’s economic slump and complicating efforts to cut debt. Italy’s economy contracted 0.2 percent in the third quarter and likely shrank more in the final three months, marking the fourth recession since 2001. Italy will remain in a recession until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said. 

The euro region’s third-largest economy has to repay about 53 billion euros in debt in the first quarter from the region’s total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months. 

Italy expects to raise almost 450 billion euros from bond and bill sales next year to cover 202 billion euros of maturing bonds and pay for a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore. The remainder of the issuances will be Treasury bills. 

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

American Firms See Europe Woes as Opportunities

As Europe struggles with its debt crisis, American businesses and financial firms are swooping in amid the distress, making loans and snapping up assets owned by banks there — from the mortgage on a luxury hotel in Miami Beach to the tallest office building in Dublin.

Jonathan Kitchen | Image Bank | Getty Images

The sales are being spurred on because European banks are scrambling to raise capital and shrink their balance sheets, often under orders from regulators. European financial institutions will unload up to $3 trillion in assets over the next 18 months, according to an estimate from Huw van Steenis, an analyst with Morgan Stanley. 

This month a team of three bankers from the London office of the buyout giant Kohlberg Kravis Roberts [KKR  13.18    0.18  (+1.38%)   ] headed to Greece to examine a promising private company that cannot get Greek banks to provide credit for future growth. The Blackstone Group [BX  Loading...      ()   ] agreed to buy from the German financial giant Commerzbank $300 million in real estate loans that are backed by properties, including the Mondrian South Beach hotel in Florida and four Sofitel hotels in Chicago, Miami, Minneapolis, and San Francisco. Commerzbank is under pressure from regulators to raise 5.3 billion euros ($6.9 billion) in new capital by mid-2012. 

Google [GOOG  Loading...      ()   ] too saw an opportunity. It bought the Montevetro building in Dublin this year from Ireland’s National Asset Management Agency, which acquired it after a huge bank rescue by the Irish government. 

“There is clearly a restructuring and shrinking of European financial institutions,” said Timothy J. Sloan, chief financial officer of Wells Fargo [  Loading...      ()   ], which last month acquired $3.3 billion in real estate loans from a bank in Ireland. “And many of the assets they’re shedding are in the United States.”

RELATED LINKS

• European Banks Struggle to Raise Capital—And Their Image
• US Firms Gear Up for Tax-Reform Battle
• Euro Zone Break-Up: A Tale of Two Car Makers

He added, “We’re keeping our eyes and ears open for the right situations.” 

American financial firms are taking the plunge in a troubled Europe despite problems of their own. In the last quarter, JPMorgan Chase [JPM  33.57    0.12  (+0.36%)   ], which has taken hits to its earnings, increased its total loans to European borrowers. 

At Kohlberg Kravis, Nathaniel M. Zilkha, co-head of the special situations group, is expanding his London team to eight, from two, and hoping to take advantage of opportunities in Europe. The firm is even considering potential investments in the country where the crisis began, Greece, despite headlines warning of a default by Athens or the possibility that Greece may withdraw from the euro zone. 

“If no one is willing to turn over the rocks, that’s when you can make extraordinary investments,” Mr. Zilkha said. “The market dislocation in Greece is creating significant opportunities that wouldn’t be otherwise available.” 

Besides Greece, Kohlberg Kravis bankers have also been looking for deals in Spain and Portugal, where private companies are having a similarly hard time winning new credit or extending existing loans. 

Ireland, whose banks were devastated by the collapse of a real estate bubble rivaling the one in the U.S., also has deep-pocketed American buyers like Google circling.

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But in many cases, the assets are much closer to home.

Last month, Wells Fargo bought the $3.3 billion in real estate loans, which are backed by commercial properties in the U.S., that had been owned by the former Anglo Irish Bank. Wells has also bought $2.4 billion in loans and other assets from the private Bank of Ireland, which is trying to raise 10 billion euros ($13 billion) after a bailout by the European Union and the International Monetary Fund .

Even with opposition from consumer advocates, Capital One Financial [COF  43.10    0.46  (+1.08%)   ] could soon win final approval from the Federal Reserve for its $9 billion acquisition of ING Direct in the U.S., one of the year’s biggest banking deals. Based in the Netherlands, ING has been forced by European authorities to divest ING Direct, an online bank, after ING required a $14 billion bailout following the 2008 financial crisis.

Experts expect these kinds of sales to jump as European banks race to meet the June deadline imposed by the European Banking Authority to raise more than 114 billion euros ($149 billion) in fresh capital. Financial institutions also have to increase their Tier 1 capital ratio — the strictest yardstick of a bank’s ability to absorb financial blows — to 9 percent of assets.

Banks get a twofold benefit from unloading assets like real estate loans and other holdings; not only do they have more cash, but there are fewer assets they must hold capital against in case of losses, thereby quickly bolstering Tier 1 levels.

Investing in Europe is not without risk; a big bet on European sovereign debt helped bring down MF Global, which went bankrupt on Oct. 31. 

RELATED LINKS

• European Banks Struggle to Raise Capital—And Their Image
• US Firms Gear Up for Tax-Reform Battle
• Euro Zone Break-Up: A Tale of Two Car Makers

And even as they jump into the new deals, some American banks must deal with their own woes, especially the overhang of soured mortgages from the subprime bubble and bust in the U,S.. Bank of America [BAC  5.60    0.13  (+2.38%)   ], for example, has raised billions recently by selling stakes in banks in Brazil and China. 

At the same time, even the strongest banks, like Wells Fargo and JPMorgan Chase, are suffering significant earnings hits from weak demand for loans, moribund capital markets, and new regulations that cut deeply into lucrative fees on debit cards and other products. 

But American institutions remain stronger than their European counterparts, said Christopher Kotowski, an analyst with Oppenheimer. 

“Everyone is going to be cutting staff and shrinking capital commitments but the Europeans are doing it more,” Mr. Kotowski said. In large part, that’s because earlier in the U.S. financial crisis, Washington forced American banks to take huge write-downs, while raising tens of billions in fresh capital and halting dividends to conserve cash. European banks have been much slower to take those steps.

Besides buying assets from struggling overseas rivals, Mr. Kotowski predicts that firms like JPMorgan Chase, Citigroup [C  27.46    -0.19  (-0.69%)   ] and Goldman Sachs Group [GS  93.79    -0.63  (-0.67%)   ] will capture more trading business on Wall Street, especially as French banks like Société Générale, Crédit Agricole, and other European institutions pull back. 

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French banks, in particular, have been heavily dependent on American money-market funds to obtain financing in dollars. With many of these funds now pulling back from those loans, French firms are shrinking. This month, Crédit Agricole said it would exit the commodity trading business, while Société Générale said it was getting out of physical gas and power trading in North America. 

Inside his firm, Stephen A. Schwarzman, the chief executive of the Blackstone Group, recently cited the $3 trillion estimate of how much European banks will have to unload, and this summer he told investors that Europe was back on Blackstone’s radar after being absent for several years. 

“As people become increasingly negative on the environment there, we think we are buying good companies at very good values,” he said.

This story originally appeared in The New York Times

France Leads World as Gloomiest Over Economy - Poll

France leads the world as the "most pessimistic" country in terms of the economic outlook, with the lowest recorded score in more than 30 years, according to a global poll published on Friday.

George Kavanagh | Stone | Getty Images

The "End of Year" survey by Gallup International of 51 countries found that France beat second placed Ireland and third placed Austria for the dubious recognition as most pessimistic, economically-speaking.

Its score of negative 79, a drop of 20 points from last year, was the lowest the poll has recorded since 1978.

"Even in 1978, after the second oil crisis that called into question an entire economic system, the French have never shown themselves as pessimistic as today," said the poll.

"Europe leads in despair, followed by North America," it said. "The rest of the world, lead by Africa, remains mostly optimistic."

With an April presidential election on the horizon and a euro zone crisis threatening havoc at home and on the continent, French voters are increasingly gloomy.

Concerns are pervasive over high unemployment, dwindling purchasing power and the fear that France's traditionally strong social support system is unravelling, even though France has mostly been spared the austerity measures taken in countries such as Greece and Spain.

"After the Second World War, there was reconstruction and our country was one of the pioneers of Europe. Today the French 'Saviour State' model, praised by both Left and Right for decades, is basically considered obsolete," said the poll. "What can the French be proud of tomorrow?"

Among a list of 51 countries, Nigeria was found to be the most optimistic country, when considering economic prosperity, followed by Vietnam and Ghana.

Between 500 and 2,700 people were interviewed in each country either by phone, via the Internet or in person between October 26 and December 13.

The survey in France, conducted by BVA, took place between December 2 and 4.

Copyright 2011 Thomson Reuters.

S&P Report on Euro Zone Ratings Expected in Jan: Sources

Standard & Poor's is expected to release its eagerly awaited verdict on debt ratings for 15 euro zone countries in January, two independent European government sources told Reuters. 

Sabine Scheckel | Image Bank | Getty Images

"We have got an informal signal from Standard & Poor's that they will come only in January," said one source who declined to be named because exchanges with the rating agency are confidential. 

"In conversations we have had, they have let this be known if you read between the lines," he added.

He said he could only speak for his country but assumed all 15 countries under review would learn of the decision at the same time. 

A senior euro zone source from another country also said the ratings agency's decision was likely to come next month. 

S&P warned on Dec. 6 that it may carry out an unprecedented mass downgrade of credit ratings of euro zone countries if EU leaders failed to agree on how to solve the region's debt crisis at a Dec. 9 summit. 

The ratings agency said it expected to conclude its review as soon as possible after the summit. An S&P spokesman declined to comment on Thursday. 

The ratings agency placed 15 euro zone countries on credit watch negative — including those of top-rated Germany and France, the region's two biggest economies — and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc. 

While credit watch negative typically signals a possible downgrade in no more than three months, S&P said at the time it expected to conclude its review "as soon as possible" following the summit. 

Policymakers at the EU summit focused on a plan for tighter euro zone fiscal rules, which they hope will prevent debt problems from worsening. 

But the market response has been cool, due also to the reluctance of the European Central Bank to play a more interventionist role. 

Other ratings agencies are also keeping a close eye on the region.

Moody's, which reaffirmed Austria's top rating on Friday, had said it would review the ratings of all 27 EU states in the first quarter of next year. 

Fitch Ratings last week put six euro zone economies including Italy and Spain on watch for potential near-term downgrades, saying it thought a comprehensive solution to the euro zone's debt crisis was beyond reach.

Italy Borrowing Costs Almost Double at Sale

Italy's prime minister Mario Monti.

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The euro fell to a seven-week low.

The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the debt, almost twice the 3.535 percent a month ago and the highest since August 1997. Italy’s two-year bonds yielded a euro-era record 7.83 percent, almost 50 basis points more than 10-year notes.

The euro extended declines, shedding 0.9 percent to $1.3213, the lowest since Oct. 3. Italy’s FTSE MIB index was the biggest decliner among European benchmarks, shedding 1.3 percent at 3 p.m. in Rome. Banks tumbled with Banca Monte Paschi di Siena SpA (BMPS) dropping 3.9 percent.

“The market action surrounding the Italian auction today provides additional precursory indications that the European government bond market is severely disrupted and it will likely struggle to absorb the demanding pipeline of refinancing European sovereigns need to secure,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

The sale came as Mario Monti, Italy’s new prime minister, prepares additional budget measures that aim to cut a debt of 1.9 trillion euros and boost the economy in a country where growth has lagged the euro-region average for more than a decade. Spain is also facing surging costs. The Treasury in Madrid paid 5.11 percent on three-month notes this week, more than twice that previous sale and higher than Greece pays. 

Italy’s two-year bonds yielded a euro-era record 7.82 percent, almost 50 basis points more than 10-year notes

‘Damaging Concessions’

“For all the periphery issuers, each auction brings such damaging concessions,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, wrote in an e-mail. “Monti and his new Cabinet better engage a faster gear but the periphery and Italy in particular face a very long, very hard road.”

Two years into the region’s debt crisis, European leaders are struggling to stop its spread and prevent contagion from affecting core countries such as France and Germany. The yield difference between French and German 10-year bonds reached the highest since 1990 on Nov. 17 and Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 auction.

The recent developments “in euro-area sovereign bond markets suggest that contagion is spreading from peripheral countries to the so-called core countries,” European Union Economic and Monetary Affairs Olli Rehn said in Rome today.

Contagion Risk

Bundesbank President and European Central Bank council member Jens Weidmann played down the risk of contagion today in an interview with Berliner Zeitung.

“Neither France nor Austria is wobbling, the interest rate levels are not, by historical comparison, unusually high,” Weidmann said, according to the newspaper. He also said German bonds remain in demand and “one shouldn’t read too much into an auction in which not all bonds were sold at low interest rates,” Berliner reported.

The market rout comes in a week that saw two EU nations have their credit rating cut to below investment grade. Fitch Ratings lowered Portugal to junk yesterday. Moody’s Investors Service followed by cutting Hungary to below investment grade.

European leaders agreed last month to try to leverage the region’s bailout fund to boost its firepower to more than 1 trillion euros to help contain the crisis. That effort may be compromised if contagion continues as the fund owes its AAA credit rating to guarantees from the euro region’s six top-rated nations. Should France lose its top rating, the fund’s lending capacity would fall by 35 percent, Mizuho Corporate Bank Ltd. analysts estimate.

Euro-Area Bonds

Monti met yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy in Strasbourg, France, to outline his plans for tackling Italy debt and discuss joint efforts to stem the crisis. Merkel reiterated her opposition to pool European risk by issuing joint euro-area bonds and also said the European Central Bank can’t be counted on as a borrower of last resort.

The ECB has been buying Italian and Spanish debt since Aug. 8 in a bid to stem surging borrowing costs. Italian bonds fell today even with the ECB purchasing the debt according to three people with knowledge of the transactions. The yield on Italy’s benchmark 10-year bond was 7.32 percent after the auction, up 22 basis points. Spain’s 10-year yield rose 10 basis points 6.72 within 10 basis points of a euro-era record.

End of Euro

Monti said that the two leaders agreed with his assessment that Italy succumbing to the crisis could spell the end of the euro.

Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers at a Cabinet meeting in Rome today, according to an e-mailed statement. That “would provoke a stalemate in the process of European integration with unpredictable consequences.”

Italy’ will test markets again next week when it seeks to raise as much as 8.8 billion euros selling four different bonds, including a 10-year, on Nov. 28 and Nov. 29.

The soaring borrowing costs won’t have a lasting impact on Italy’s debt even as the Treasury prepares to sell 440 billion euros of bonds and bills next year, Maria Cannata, director of public debt at the Treasury, said on Nov. 16.

Debt Peaking

The amount “sounds prohibitive, but it’s not, even if things have gotten more complicated as investors are frightened by the volatility,” Cannata said at a conference in Milan. Italy’s first bond redemption comes on Feb. 1, when it must pay back 26 billion euros for debt sold 10 years ago.

Unlike Greece, Ireland and Portugal, Italy’s budget deficit is under control and the country already has a primary surplus, meaning that a debt of about 120 percent of gross domestic product should start falling from next year. Italy’s outstanding debt has an average maturity of more than seven years and more than 75 percent of it is in longer-dated maturities, Gustavo Bagattini, European economist at RBC Capital Markets in London, wrote in a report on Nov. 17.

The “relatively long-term nature” of Italian debt “makes it very resilient to interest-rate shocks in the short term,” Bagattini said in a report published yesterday. “From a pure fiscal sustainability point of view, the message is clear that even 10-year borrowing costs of 8 percent, although undesirable, would not send Italian debt spiraling out of control.” 

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net; Jeffrey Donovan in Prague at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

Europe's debt: Pressure's on

NEW YORK (CNNMoney) -- Investors kept the pressure on European debt on Thursday as interest rates on government bonds remained at elevated levels, a day after a weak Germany bond auction rattled markets in the United States.

German 10-year bond yields rose to 2.26% in early trading before backing off slightly to end the session at 2.19%. Meanwhile Italian 10-year bond yields again rose above the bailout benchmark to a high of 7.13%, before closing at 7.11% on Thursday.

On Wednesday, Germany suffered from a lack of strong demand for its safe bunds, with the government selling only €3.6 billion. The results suggest "that Germany is not immune to increasing risk aversion in the [eurozone] sovereign debt market," wrote Marc Chandler of Brown Brothers Harriman. 

Germany is the largest economy in Europe, followed by France, and is considered to be a pillar of the eurozone economy. Therefore, its bonds are consider the gold standard of sovereign debt, keeping its yields relatively low. 

French 10-year bond yields rose slightly Thursday, closing at 3.72%.

As Italian bond yields flirt with the 7% danger zone -- it's another red flag to investors about the debt-ridden eurozone.

While 7% does not automatically trigger a bailout, it is the level that Ireland, Portugal and Greece exceeded before they got bailed out by their European neighbors.

Italian bond yields exceeded 7% earlier in November, then dropped back below the benchmark. The Italian economy is the third largest in the eurozone; a default on Italian debt would likely exact a heavy toll on Europe. 

Meanwhile on Thursday, credit rating agency Fitch downgraded Portugal to junk status, based on the country's high debts and poor economic prospects.

Europe's Debt Crisis

Searching for solutions: The critical situation in Europe has left officials groping for answers.

European leaders met Thursday in France to discuss options for handling the eurozone debt crisis.

"The situation is not easy, trust has been lost, and that is why it's important that we demonstrate that we trust each other," said German Chancellor Angela Merkel at the eurozone press conference. 

"We have to make it clear that we want to take steps in the right direction of a fiscal union, to express our belief that politics have to be coordinated when you have a common stable currency."

French president Nicolas Sarkozy added that, "We are determined as the three big economies of the eurozone to do all we can to support and guarantee the sustainability of the euro."

On Wednesday, the European Commission unveiled a plan detailing options for so-called eurobonds. Some see eurobonds as a way out of the debt crisis, because they would effectively pool the debt of the 17 eurozone countries. 

But the idea is controversial and has drawn opposition from stronger eurozone countries, particularly Germany. 

Europe's healthier nations are concerned about becoming liable for the debt service payments of entire regions, including Greece and Italy, without having a say in their future fiscal actions and policies.