French Banks Default Swaps Soar; Italy Sells

Arthi Gupta
13 Sep, 2011
New York City

The European indexes extended losses as French banks base difficulty in rolling over loans in the U.S. Italy held talks with Chinese officials for possible bank stake sale. The Italian Treasury sold

[R]1:30 PM Frankfurt – The European indexes extended losses as French banks base difficulty in rolling over loans in the U.S. Italy held talks with Chinese officials for possible bank stake sale. The Italian Treasury sold €3.8 billion in 5-year debt.[/R]

European markets were on the edge for the third day in a row as French banks remained in focus. U.S. based money market funds continue to trim its lending to French banks.

U.S. money market funds decided to not renew more than $50 billion in loans to banks as concerns continue to mount on the health of the French banks. The U.S. money markets still rolled over $160 billion of short term loans in August, nearly 40% lower from July, according to a research note from JP Morgan Chase.

BNP Paribas declined 3% but Societe Generale and Credit Agricole SA gained more than 3%.

Credit default swaps to insure $10 million of Credit Agricole debt increased to 3.25% yesterday from 1.1% in April. Similar derivative contracts on Societe Generale surged to 4.5% from 1.05% in April.

Societe Generale said in a press note that it has cut its unsecured dollar funding to $33 billion from $77 billion in July. The bank is looking to fund its capital in alternative markets.

German Chancellor Angela Merkel said in an interview to Germany''s Info on RBB radio an uncontrolled bankruptcy of Greece must be avoided. She further added that the euro could only be stable if uncontrolled processes would be prevented.

The CDU leader added that the International Monetary Fund, European Central Bank and European Commission this week will go back to Greece indicating that Greece had brought some things to the series, which are necessary.

The European Commission said in its 2011 Report on the Public Finances in EMU ensuring the sustainability of public finances is a prerequisite for enduring economic growth and job creation.

The analysis also shows that EU countries are currently making historically large fiscal consolidation efforts.

The Swedish government proposed to lower the value-added tax on restaurants and catering services by more than half as part of a government spending package designed to boost employment among young people. The tax will be reduced to 12% from the current 25% from January 1, 2012.

The government plans to spend SEK 7.5 billion between 2012 and 2015 to increase young people''s chances of finding employment.

The International Energy Agency lowered 2011 global oil product demand growth by 0.20 million barrels per day and slashed its 2012 outlook by 0.40 mbd.

The agency said that global oil demand this year will be 89.3 mbd on average, up 1.0 mbd year-over-year, and for 2012 demand will average 90.7 mbd, up 1.4 mbd year-over year.

In Paris, CAC-40 Index fell 43.42 to 1.52% to 2,811.39 and in Frankfurt DAX Index edged lower 10.89 or 0.21% to 5,061.44.

Italy Seeks China’s Help

An Italian government spokesman confirmed that the country''s Finance Minister Giulio Tremonti held talks with Chinese officials earlier this month, reports said on Tuesday. However, it is still unclear whether bond purchases were discussed.

The media reports suggest that China may have considered taking stakes in Italian banks.

Separately, the Italian Treasury today sold €3.8 billion in 5-year debt at an average yield of 5.6% compared with 4.93% in a similar auction held on July 14. The bid-to-cover ratio was 1.28 times compared with 1.93 times at the previous sale.

Gainers & Losers

Accor SA slumped 4.77% to €20.49 after the French hotel group estimates higher earnings in fiscal 2011 and plans to reduce net debt further. The company expects operating earnings of €510 million to €530 million in 2011.

Koninklijke Philips Electronics N.V. dipped 0.6% to €12.15 after the Dutch electronics company estimated comparable sales growth targets of 4% to 6%, operating earnings of 10% to 12% and return on capital of 12% to 14% by 2013.

PSA Peugeot-Citroën S.A. fell 1.45% to €16.28 after the French carmaker, as part of its efforts to prepare for an economic slowdown or recession, has begun reducing shifts and small car production, the Financial Times reported on Tuesday, citing Chief Executive Philippe Varin.

The company might need to cut its headcount as well, as part of its cost saving efforts, the report said.

Royal DSM N.V. dropped 0.23% to €30.47 after the Dutch nutrition company said it sold its U.S.-based subsidiary DSM Personalized Nutrition, LLC to New Jersey-based, privately-held, Viocare, Inc. Financial details of the deal will not be disclosed.