Contagion Fears in Europe; Portugal, Spain, Germany in Focus

Arthi Gupta
25 Nov, 2010
New York City

Investors in Europe face rising sovereign debt stress and yields spreads widen as focus shifts to Portugal, Spain and Germany. Belgium banks have a significant exposure in Ireland. French consumer confidence improved in November and German building industry orders declined in September.

[R]4:00 PM Frankfurt – Investors in Europe face rising sovereign debt stress and yields spreads widen as the focus shift to Portugal, Spain and Germany. French consumer confidence improved in November and German building industry orders declined in September. Switzerland employment rose in the third quarter.[/R]

Tensions are rising in the euro zone as investors’ debate fate of Portugal, Spain and Italy. Comments from German Chancellor Angela Merkel have already rattled bond markets this week but yield premium between bonds of Portugal and Germany stayed near 720 basis points.

Currency and bond traders are worried that with the rising bailout costs and spreading debt contagion in the region may eventually raise costs for German banks and the nation and the euro face more tensions. In additions, comments from Slovak finance ministers were widely circulated in trading circles.

Slovak Finance Minister Ivan Miklos said, """"""""The risk of a euro zone break-up, or at least its very problematic functioning, is very real.""""""""

The yield on 10-year Italian bonds increased to 4.28% and the yield premium on Irish bonds increased to 6.31% and on Spanish bonds rose to 2.48%.

European Central Bank Council member Axel Weber said that EU bailout fund size may have to be increased to bolster confidence in the currency.

Separately, the Bundesbank said in its Financial Stability Review 2010 that a protracted phase of low interest rates may create undesirable incentives.

The German central bank warned persistently low interest rates are promoting the trend towards short-term refinancing and increased maturity transformation. Furthermore, the bank said abundant supply of liquidity could encourage a prolongation of impaired loans, which could create potential weaknesses in the financial sector in the longer term.

In Paris CAC 40 Index dropped 1.61 or 0.04% to close at 3,746.00 and in Frankfurt DAX Index edged higher 19.32 or 0.28% to close at 6,843.12.

In light trading markets in Asia closed generally higher as U.S. markets are closed for Thanksgiving holiday.

Ireland Announces Austerity Plan

The Irish government unveiled a four-year economic plan that it pledged in return for a bailout package of €90 billion from the European Union and the International Monetary Fund.

The austerity plan unveiled by Ireland is aimed to save €15 billion and the government decided to gradually phase higher VAT from 2013, reduce minimum wage, a new property tax and cut public sector jobs. However, corporate tax remained unchanged at 12.5%.

Despite this, Standard & Poor''s cut the Republic''s sovereign credit rating by two notches to A from AA- and the short-term rating was lowered by one notch to A-1 from A-1+.

The rating agency cited the country''s larger than expected borrowing requirements to finance its troubled banking system. The agency forecast net Irish government debt at the end of 2012 to exceed previous projections of 113% of GDP and said that the growth rate projections for next two years are too optimistic.

Investors are increasingly factoring a bailout plan for Portugal and Spain may be forced to cut more spending deal with its banking system.

However, Finance Minister Elena Salgado said in an interview with Punto Radio on Wednesday that there is no risk that Spain will need an international bailout.

She said austerity measures are producing results and the government targets to reduce its overall budget deficit to 6% of GDP in 2011. The public sector budget deficit was around 3.45% of GDP during January to September, 42% lower than the same period last year.

But, Portuguese workers brought the country to a near standstill yesterday as they staged a 24-hour nationwide strike in protest against the Socialist government’s austerity measures. Unions fear the government’s austerity measures may lead to job cuts and a severe squeeze in income.

German Chancellor Angela Merkel said that the euro is facing an extraordinarily serious situation with Dublin''s deficit level worrisome. However, she felt Ireland''s decision to request for financial aid was a step in the right direction.

In a speech at the Parliament, Merkel stressed the stability of the euro area needs to be assured. She also underlined her call that private creditors should also take part in future bailout when the current sum of €750 billion expires in mid-2013.

In further developments, the Irish Times citing information from the Department of Finance said that the International Monetary Fund and the European Commission will have the authority to recommend changes in Irish government''s four-year austerity plan. A finance ministry official reportedly said the two external agencies can suggest changes during negotiations.

French Consumer Confidence Improves

The statistics office Insee reported that the French consumer confidence indicator rose to minus 32 in November from minus 34 in October for the fourth straight month.

The report suggested that households'' view about their financial situation in the past twelve months improved in November with a positive outlook regards their future financial situation. On the other hand, consumers'' expectations rose.

German Building Industry Orders Decrease

The German Federal Statistics Office said today that the total value of orders received by building construction and civil and underground engineering enterprises decreased 1.1% annually in September. Building construction orders increased 1.2%, while civil and underground engineering demand decreased 3.2% in September.

The total turnover from the construction industry amounted to €8.3 billion, which was 1.6% higher than a year ago.

Spanish PPI Soars

The National Statistics Institute released data wherein Spain''s producer price index rose 4.1% annually in October following a 3.4% increase in September.

On a monthly basis, the PPI climbed 0.6% in October, following a 0.2% growth in September.

Hungary Retail Sales Climb

The Hungarian Central Statistics Office said in a report released today that retail sales grew a calendar and seasonally adjusted 0.4% on a monthly basis in September, compared to a 0.6% fall in August. A year earlier, retail sales increased 0.1%.

Annually, retail sales grew 0.9% in September, compared to a flat reading in August. However, retail sales were much better than a 6.7% fall recorded a year earlier.

The volume of sales in non-specialized and specialized food, beverages and tobacco stores slipped 1.3% annually in September, while the turnover of non-food retail trade grew 1.6%.

Sweden PPI; M3 Money Supply Increase

Statistics Sweden said on Thursday that Swedish producer prices rose 2.3% in October on a yearly basis. However, producer prices fell 0.7% on a monthly comparison.

During the past twelve months, producer prices increased 3.6% on the domestic market, and on the export market 0.7%. On a monthly basis, export prices decreased 2.1% in October and import prices 2% on average, mainly due to a stronger Swedish krona.

Sweden''s M3 money supply increased 5.8% annually in October, following the 5.1% increase in September, Statistics Sweden said on Thursday.

In another report, Swedish economic sentiment indicator rose to 114.1 in November from a revised 110.3 in October, a survey by the National Institute of Economic Research, or NIER, showed today.

The survey showed that the consumer confidence indicator declined to 22.6 in November from 23.4 in October.

Swiss Employment Rises

According to data released by the Federal Statistics Office today, Switzerland''s employment rose 1% annually in the third quarter to 4.08 million. In the second quarter, employment was 4.06 million. Employment increased 0.3% in the secondary sector, while the increase in tertiary sector was 1.2%.

Switzerland''s seasonally adjusted jobless rate fell to 3.6% in October from 3.7% in September, the State Secretariat for Economic Affairs said on November 8. The number of unemployed declined to 143,050 in October, from 145,777 in September.

Dutch Producer Confidence Dampens

Dutch producer confidence fell 0.3 in November compared to 0.5 in October, the Central Bureau of Statistics said today.

Polish Retail Sales Grow; Jobless Rate Flat

The Central Statistics Office said on Thursday that Polish retail sales rose 9% annually in October following an 8.6% increase in September. On a monthly basis, retail sales soared 4.3% in October as against a 1.2% growth in September.

In another report, the Central Statistics Office said Polish jobless rate unexpectedly stabilized in October. According to the report, the registered unemployment rate stayed at 11.5% in October, unchanged from September. A year ago, the unemployment rate was 11.4%.

Italian Manufacturing; Retailers'' Sentiment Improves

Italian manufacturing sentiment index climbed to 101.6 in November from 100.1 recorded in October, according to survey results from research institute ISAE released today. The increase in confidence was concentrated in intermediate goods industries and capital goods industries.

A separate survey conducted for measuring retailers’ confidence rose to 102.5 in November from 101.7 in October. ISAE said the increase in retailers'' confidence was due to an improvement in sales expectations.

Gainers & Losers

Aker Solutions ASA fell 0.11% to NOK 91.00 after the Norway-based company operating in the oil and gas industries said it signed subsea contract with China National Offshore Oil Corp. to supply a subsea production system for the Yacheng 13-4 gas field. The contract is valued at about $20 million.

Antofagasta plc dropped 0.15% to 1,371.00 pence after the British mining company reported nine-month group revenue surged 56.9% to$3.17 billion, from $2.02 billion last year. Revenues rose on higher copper and molybdenum during the period, and on increased copper sales volumes.

Bayerische Motoren Werke AG gained 0.79% to €59.59 after the German automobile manufacturer signed an agreement to supply 100,000 BMW and Mini models to German car rental company Sixt over the next five years.

Deutsche-Lufthansa AG rose 1.24% to €16.74 after the German airline announced plans to squeeze in an extra 2,000 seats into its single-aisle fleet of airplanes by the end of next year by switching to seats that have slimmer back rests.

Grainger Plc increased 2.59% to 93.25 pence after the UK-based residential property owner reported fiscal year 2010 revenues fell 19% to £244.5 million from £302.2 million a year ago. Full-year loss narrowed 91% to £10.8 million or 2.9 pence per share, compared to £122 million or 50.8 pence per share last year.

Regal Petroleum plc surged 42.00% to 17.75 pence after the oil and gas explorer said it got a number of approaches in relation to a potential offer for the company as the company conducted strategic review in September.

Swedish Orphan Biovitrum AB slumped 3.18% to SEK 39.60 after the pharmaceutical company said its CEO Martin Nicklasson will leave the company on January 1, 2011 replaced by Kennet Rooth, current head of marketing and sales.