Italian Debt Sale Fails to Improve European Market Sentiment

Arthi Gupta
12 Jul, 2011
New York City

European finance ministers failed to resolve the participation level of private lenders in the second Greek bailout after six hours meeting on Monday. Growing Italian debt fears dragged European indexes more than 2%. Italy completed short term debt sale at a sharply higher rate.

[R]1:30 PM Frankfurt – European finance ministers failed to resolve the participation level of private lenders in the second Greek bailout after six hours meeting on Monday. Growing Italian debt fears dragged European indexes more than 2%. Italy completed short term debt sale at a sharply higher rate.[/R]

European market indexes declined more than 2% for the second day this week after a weak statement from the euro-zone finance ministers as Italian worries added to the fragile world markets sentiment.

Italy completed the debt sale that saw the yields jump more than 150 basis points from a month ago and entered the danger zone that increases chances of Italy of seeking a bailout. Rating agencies came under fire again.

Euro-zone finance ministers vowed to take additional measures, including enhancing the flexibility and scope of the European Financial Stability Facility, to prevent contagion risks of the debt crisis.

Other measures included lengthening the maturities of the loans and lowering the interest rates. However, those statements failed to convince financial markets.

Jean-Claude Juncker, president of the Eurogroup of finance ministers, told a press conference that talks were still underway on the extent to which the private sector will be involved in the second bailout package for Greece.

The ministers said a working group will explore the financing conditions of a new aid program to Athens, steps to reduce the cost of debt-servicing and means to improve Greek debt sustainability.

Greek prime minister in a letter to Jean- Claude Juncker shared his frustration and noted that financial market turmoil is undermining his government efforts to implement reforms and track back to the path of stability and sought “collective decisions” from his European neighbors.

Separately, the European Union is planning for tougher regulations on debt ratings by credit rating agencies, including a ban on rating actions on countries under international bailout aid.

""""We must firstly be more demanding regarding ratings of sovereign debt,"""" reports quoted European Commissioner Michel Barnier as saying in Paris.

Moody''s came under heavy criticism across the EU last week after downgrading Portugal''s rating to """"junk"""" status, casting new doubts on markets over EU efforts to manage the euro-zone debt crisis.

Italy sold €6.75 billion or $9.4 billion of one-year bills at an average yield of 3.67%, compared to the average yield of 2.14% in the similar auction on June 10.

The bid-to-cover ratio fell to 1.55 from 1.71 in June, when the treasury raised a slightly lower €6 billion.

In Paris CAC-40 Index plunged 89.81 or 2.36% to 3,717.70 and in Frankfurt DAX Index edged lower 161.64 or 2.24% to 7,068.61. The benchmark index in Italy was fractionally lower and rebounded from the earlier 4% decline before the completion of debt sale and the index declined 0.3% in Spain.

French Inflation Rises

Consumer price annual inflation in France rose marginally to 2.1% in June from 2% in May. Monthly inflation was at 0.1% in June, like in May.

German Inflation Flat

Germany''s inflation remained above the 2% threshold for the fifth consecutive month, the Federal Statistics Office said in its final report.

Consumer price annual inflation was at 2.3% in June, in line with the flash estimate published on June 28. The annual inflation rate had also been 2.3% in May.

Consumer prices edged higher 0.1% on a monthly basis in June, after remaining flat in May.

Gainers & Losers

Fraport AG slumped 3.33% to €55.15 after the owner and operator of Germany''s Frankfurt Airport reported a 8.3% increase in passenger traffic during the first-half of 2011 to 26.53 million from 24.49 million in the year-ago period.

Nokia Corp. plunged 4.18% to $5.96 after the Finnish mobile phone maker said that mutual fund manager Dodge & Cox Inc.''s holdings in the company currently stands at 5.03% of its share capital.

Koninklijke DSM N.V. fell 1.74% to €43.13 after the life sciences and materials sciences-based company successfully acquired a 51% stake in AGI Corp. of Taiwan through a subscription for newly to be issued shares combined with a public tender offer for about €41 million.

Volkswagen AG dropped 2.92% to €139.55 after the German automaker sold a record four million vehicles in the first six months of this year, Chief Executive Officer Martin Winterkorn said in Berlin.