European markets traded lower on Friday, following the auction of Italian government bonds which resulted in record-high yields and on continuing worries with the European debt crisis.
The yield on Italy’s 10-year government bonds grew by 16 basis points to 7.3%, which is the highest outcome in 14 years. The short term bond auction resulted in almost doubled borrowing costs for the 6-month bills (6.504% from 3.535%) as well as for the 2-month bills (7.814% from 4.628%). New Bank of Italy Governor Ignazio Visco stressed in his first public speech that Italian economic growth can be revived only by a quick introduction of structural reforms.
Kathy Lien, Director of Currency Research for GFT, considers essential a quick action on the part of European leaders in order to prevent further contagion of the debt crisis in the area: “European officials need to act and act quickly if they want to prevent Spanish yields from rising to Italian levels and to save Italy from paying more than 8 percent to borrow. Italian bond yields are moving into very dangerous territory and if nothing is done reverse the rise in borrowing costs, we could get fall into a vicious cycle where borrowing costs rise, triggering downgrades which then cause yields to increase further - all of which is bearish for the euro.”
Moody’s cuts Hungary’s rating to junk status
Moody’s Investor’s service cut Hungary’s government bond rating from Baa3 to Ba1, with a negative outlook. The downgrade comes after the country requested financial aid from the EU and the IMF earlier this week.
The main reasons for Moody’s action was Hungary’s high level of debt, a slowdown in economic growth and uncertainty whether the country is able to “meet its targets on fiscal consolidation and public sector debt reduction.”
The agency justified its decision by stating that: “Moody’s believes that the combined impact of these factors will adversely impact the government’s financial strength and erode its shock-absorption capacity. The rating agency’s decision to maintain a negative outlook on Hungary’s ratings is driven by the uncertainty surrounding the country’s ability to withstand potential event risks emanating from the European sovereign debt crisis.”
Merkonti takes over: Fiscal union first but slam to eurobonds
New times for the Eurozone seem to approach in the next months, or the market could assume something like that after the latest Euro leaders press conference with the French President Nicolas Sarkozy, new Italian Prime Minister Mario Monti and German Chancellor Angela Merkel saying that they will put forward a “treaty reform proposal before December 9”. But after the developments throughout 2011, will the market believe their words today?
The three biggest economies in the Euro area held the first meeting on Thursday after the resignation of Silvio Berlusconi in Italy and with the pressure of the Wednesday bund fiasco and the spiraling debt crisis that is hurting PIIGS and Belgium. Now Merkozy has turned into Merkonti and after discussing the reforms planned by the former EU commissioner Monti to restore confidence in Italy - Merkel stated that “the Italian reform agenda is very impressive”-, The tripartite said, in Sarkozy’s voice, that "France and Germany will make joint proposals in the days ahead to modify the EU treaties.”
Almost at the same time, Angela Markel emphasized that the treaty changes are “not about ECB, which is independent.” Sarkozy continued saying that the three leaders have agreed "not to make demands on ECB.”
“We will make proposals for closer political cooperation because a lot of confidence in politics in Europe has been lost,” said Angela Merkel.
Sanctions for EMU violations, fiscal union and the immortality of the Euro will be the topics in Merkonti’s proposal. German Chancellor said that “treaty change debate is about sanctions for EMU violations in court if necessary,” and Mario Monti said, asked about Euro Bonds, that before pooling of assets and liabilities the Euro Zone “must go to fiscal union first.” Merkel stated that to have "common interest rate on euro bonds” would be “a completely wrong signal,” and she concluded that “Euro bonds would weaken us all.”
“The problem with France and Germany proposing a joint treaty reform is that the other 15 countries still have to ratify it,” commented the Euro debt expert Megan Greene in her Twitter account. “ECB will shoot Ireland down again in request for debt relief, but then EZ leaders plan to ask Irish to pass treaty change in ref? Good luck!”, Greene stated.
Laconic was the Monti intervention when he said that the Franco-German pact to breach European Union Budget Rules in 2003 was “a mistake” after commenting that stability bonds would be feasible but with a “fiscal union first.”
“Merkel is right in theory to demand pool union,” commented Megan Greene, “then pooling of assets and finally pooling of liabilities,” Greene pointed out in her Twitter. “But needed to start 20 yerrs ago,” she wrote.
Fitch downgrades Portugal
Fitch Ratings agency downgraded Portugal to BB+ to from BBB-, widely considered as “junk” status in the light of its large fiscal imbalances and weak macroeconomic outlook. The outlook for Portugal is “negative” said Fitch in a press release published Thursday.
Fitch decided to downgrade Portugal’s long term foreign and local currency Issuer Default Ratings (IDR) to ‘BB+’ from ‘BBB-’ after lowering the country growth forecast “in light of the worsened European outlook”, according to the agency. Fitch expects now a contraction by 3% in the GDP during for 2012, despite that, “significant structural reforms expected under the programme should leave Portugal in a more competitive position in the long term.”
France and its AAA rating
France faced more pressure on Wednesday as the Fitch rating agency published a special report on the country’s public finances, stressing that the rise in the country’s government debt made it more vulnerable to further crisis shocks. Like Moody’s on Monday, Fitch suggested that this situation threatens France’s current AAA rating.
To take the tone of the market, reading Fabrizio Goria, financial reporter, in his Twitter account, he commented during the press conference according to the Sarkozy speech: “Can you smell the fear of Sarkozy about FrAAAnce?”
The problems inside the euro area are coming from different sides, fundamental economic data showed on Wednesday that the evidence of the Eurozone falling into recession is rising with PMIs from France, Italy and Germany among others countries falling into contraction levels, and industrial orders in the whole euro zone posting a laconic 1.6% of monthly rise in September but with a 6.4% decline on yearly basis. In the Merkonti meeting, Monti stated that “deficit targets may have to be adjusted to economic cycles,” but this conclusion seems to have arrived little bit late, as Nouriel Roubini wrote in his Twitter account just after the press conference, “Monti is right to argue that fiscal targets should be cyclically-adjusted. Excessive austerity in a recession is pushing the Euro Zone into a depression.”
