SPAIN and France managed to sell all their bonds at their auctions yesterday, but investors were wary and European stocks, bonds and the euro lurched downwards.
The Spanish treasury raised 2.5 billion euros (S$4.1 billion) via the issuance of short and long-term debt. Both issues were oversubscribed by two to three times, but yields were higher than at previous auctions.
The yield on the two-and-a-half year bond, which raised 1.1 billion euros and matures at the end of October, 2014, was 3.463 per cent. The 10-year bond maturing in January 2022 raised 1.4 billion euros at a yield of 5.743 per cent, well up from 5.4 per cent in the previous auction in January.
On the secondary market, Spanish bond yields rose above 5.8 per cent, marginally below their recent highs of around 6 per cent.
France raised 7.97 billion euros via the issue of short and long-term bonds. Similarly to the Spanish auction, investors bid for almost three times the amount on offer, despite worries about poll indications that the socialist Francois Hollande will ultimately become president on May 6.
A French short-term note due to be repaid in September 2014 had a yield of 0.85 per cent and a five-year note due to be repaid in February 2017 had a yield of 1.83 per cent compared with a similar bond issue in March which yielded 1.75 per cent.
Ten-year French bonds trading on the secondary market are on yields that exceed 3 per cent, almost double the level of German bunds which are trading on 1.7 per cent.
Investors fear that the European Central Bank's long term refinancing operation (LTRO) is beginning to lose its impetus.
Spanish banks, which are struggling, borrowed an estimated 200 billion euros under the LTRO programme, and almost two fifths of this money was used to buy Spanish sovereign debt, according to estimates of UBS. There has been a run on the banks which also had to refinance debt and as a result, the banks have 21 billion euros at the most to purchase further Spanish bond issues, estimated at 47 billion euros in the remaining months of this year.
Illustrating the pressures on Spanish banks, their bad debts and problematic loans rose to a 17-year high in February, as companies and households fell further behind on debt payments. The implosion of a property bubble that hit its peak in 2007 and the consequent economic slump and surge in unemployment are the cause.
The Bank of Spain calculated that 8.2 per cent of the loans held by banks, or 143.8 billion euros, were more than three months overdue for repayment in February. The central bank also said that overall lending fell for a fourth month in a row. Worse still, government data indicated that the house price slump had accelerated.
Some analysts thus believe that a Spanish bailout, similar to Greece and Portugal, is thus inevitable at some point this year. Especially since foreign investors have cut their holdings of Spanish sovereign debt to 42 per cent of the total as at the end of February, down from 50 per cent in December 2011.
Pacific Investment Management Company chief executive Mohamed El-Erian said in an interview with German weekly Die Zeit, however, that the huge bond fund is buying and holding Italian and Spanish sovereign debt.
"It is important to make a clear distinction between individual countries; Spain isn't insolvent! Italy isn't insolvent!," Mr El-Erian said. "If Spain can convince investors that it is making progress in restructuring its banks, it won't need external help."
Other investors are fearful and notice with interest that the International Monetary Fund is aiming to raise between US$300 billion to US$400 billion, part of which will be used to help the ECB and the European Union bolster nations that are struggling in the eurozone.
Meanwhile, Fitch Ratings threatened a downgrade of the AAA rating of the Netherlands if the nation fails to reduce its budget deficit.
The Dutch coalition government is thus in frantic talks with its right-wing ally, the Freedom Party, on a package of measures to bring the deficit below the European Union limit of 3 per cent of gross domestic product in 2013. The talks, now in their seventh week, have been hampered by political arguments about the austerity measures.
"The Dutch are on the edge of a negative rating action," Fitch's director for Western Europe, Chris Pryce, told the Daily Telegraph newspaper in an interview. The rating firm will consider its rating of the Netherlands in June, and placing it on negative outlook is a possible first step towards an eventual downgrade, he said.
The Netherlands is one of the four remaining AAA-rated countries in the eurozone, alongside Germany, Finland and Luxembourg.