European Markets Struggle; Yields Rise in Spain, Italy and Belgium

Devan Biswas
25 Jul, 2011
New York City

The European markets struggled after the Greek bailout agreement on Friday. The bond yields of Italy and Spain rose as the euro-zone ministers agree to share pain to rescue Greece. Belgian banks fell as the pressure mounts on the government to pass more austerity measures.

[R]5:00 PM Frankfurt – The European markets struggled after the Greek bailout agreement on Friday. The bond yields of Italy and Spain rose as the euro-zone ministers agree to share pain to rescue Greece. Belgian banks fell as the pressure mounts on the government to pass more austerity measures.[/R]

The European markets opened slightly higher but failed to maintain the positive tone and looked for a debt-talk resolution in the U.S.

The White House and Republican controlled House remained far apart in their agenda and in raising debt ceiling of $1.43 trillion. However, at least for now markets are anticipating some kind of compromise in the last hour to avoid a government shutdown that looms on August 2.

European markets took the note of the settlement of the conditions for the second Greek bailout with private lender participation but that failed to convince at least one rating agency.

The euro-zone for the first time agreed to spread the pain of sovereign default among all member nations as requested by the European Central Bank and resisted by Germany. The sharp change in direction may pose a significant challenge for German Chancellor Angela Merkel at home.

Separately today, Moody’s lowered the Greek debt by three notches and said the default is almost certain and the nation faces serious medium term solvency issues despite the bailout. The company said in a statement that the distressed exchange is likely to lead to a Greek government bond default “virtually certain.”

In Europe, markets looked at the U.S. for the direction after ministers in the euro-zone approved second bailout on Friday that will also share loan losses with banks of as much as 50 billion euros. Banks have agreed to a 21% loss on Greek bonds in a 37 billion euros contribution.

The compromise struck on the last minute by German, France, the European Central Bank and other regulatory agency will provide at least $200 billion of new loans to Greece for a period of as long as 30 years at a rate of 3.5%.

The last minute deal also expanded the authority of the European rescue fund to buy sovereign bonds of other troubled nations and expanded its purchasing authority to 440 billion euros. The move is expected to lower the rising yields of various countries including Italy and Spain.

However, the yields on Spanish bonds rose back and inched near 6% as in the last week. The 10-year bond rose to 5.8% and the yield on the Italian bonds rose to 5.46%.

The CAC-40 index declined 29.73 or 0.8% to 3,812.97 and the DA 30 index increased 18.15 or 0.3% to 7,344.54.

The benchmark index in Italy dropped 2.5% to 18,979.40 and in Switzerland declined 0.2% to 6,017.90 and in Spain fell 1.9% or 193.10 to 9,866.20.

Stock Movers

Fiat Industries SpA gained 5% to 9.45 euros after the recently spun-off truck and tractor maker lifted its current year operating earnings outlook to 1.5 billion euros.

The euro-zone debt contagion spread to Belgium and knocked down banks in Italy and Spain.

Dexia SA dropped 8% to 1.99 euros, the largest Belgian lender on the worries that the domestic government debt may be the next domino to fall.

Banks in Italy were among the leading decliners and insurers in the Europe were also lower on the worries that rising yields will cut down the value of the bond portfolios.

Popolare di Milano dropped 8% to 1.55 euros and Intesa Sanpaolo declined 8.3% to 1.60 euros. UniCredit SpA fell 7.1% to 1.24 euros.

Bank of Ireland gained 1% to 10.18 euros after Finance Minister Michael Noonan said that government managed to sell 68% of the stake in the bank to a less than 10 unnamed institutional investors.

Hansen Transmissions International NV soared 90% to 65 pence after it agreed to be acquired by ZF Friedrichshafen AG for 66 pence a share or 445 million pounds.