European Leaders Haggle on EFSF Use; Italy Sells

Nichole Harper
13 Oct, 2011
New York City

European markets declined as leaders work to settle differences in how to use the rescue fund. Germany and at least five other nations are demanding that the facility should be tapped only on the last resort and banks must seek capital in the financial markets first. Italy sold

[R]3:38 PM Frankfurt – European markets turned lower as political leaders work to settle differences in how to use the rescue fund. Germany and at least five other nations are demanding that the facility should be tapped only on the last resort and banks must seek capital in the financial markets first. Italy sold €6.2 billion bonds.[/R]

European markets were under pressures after political leaders sent mixed signals.

Though the plan to recapitalize banks is taking shape before the crucial meeting on October 23 division among the 17-member euro zone is deepening.

Germany, Holland, Finland and Slovakia are on one side demanding that the €440 billion expanded rescue fund should be used as a last resort and France, Spain and Portugal and Greece on the other side asking to tap in the facility immediately.

At least for now it appears that banks will be asked to raise capital on their own from investors or public markets and then use national funding before tapping into the emergency facility that is close to setting up.

European Commission President Jose Manuel Barroso urged European leaders to expedite the release of 8 billion tranche aid to Greece and said banks must tap investors and national government funds before securing loans from the EFSF.

Banks were quick to condemn the Barroso plan and said that the plan to temporarily increase capital that meets Basle III standard is not likely to be favored by investors. Deutsche Chief Executive Josef Ackermann said, “The injection of capital wouldn’t solve actual problems” and government bonds are not risk-free anymore.

Slovakian leaders agreed on late Wednesday to pass the measure to increase its contribution to €10 billion to the European Financial Stability Facility.

Separately, Italy sold €6.2 billion of government bonds of various maturities and the auction drew 1.45 bid-to-cover ratio.

The Italian government sold €1 billion of long term bonds maturing 2025 that are not covered by the ECB bond buying program. Italy plans to sell €75 billion of bonds in the current quarter and so far raised €16 billion.

Italy also sold €5.2 billion bonds maturing in five years that yielded 5.32%, lower than the peak yield of 5.6% in September.

Yesterday, German bunds fell 60 ticks after German auction of €1.625 billion 30-year bonds drew a weak response and fell short of the offered amount. The appetite for long term bonds even issued by Germany are very low as interest rate hover near record low and inflation is expected to perk up.

The European Central Bank said only six banks accessed its emergency credit facility and lent $1.35 billion, significantly lower than most market watchers expectations.

The CAC 40 index decreased 0.9% to 3,200.63, the DAX index fell 1% to 5,930.80 and the market indexes in Switzerland fell 0.9% and in Greece rose 0.8% and in Italy dropped 2%.

Greece’s cash deficit increased nearly 4% from a year ago period of nine months ending in September according to its central bank. The government’s cash deficit increased to €19.23 billion from €18.5 billion a year ago period.

Stock Movers

Volkswagen AG decreased 1.4% to €99.97 and Daimler AG fell 63 cents to €37.22 and BMW AG declined 66 cents to €54.25.

Greek banks soared after the troika of international certified the nation for the release of aid.

UniCredit SpA dropped 5.5% to 99 cents, Banco Popolare declined 4.7% to €1.29 and Intesa Sanpaolo SpA decreased 4% to €1.35.

BNP Paribas SA decreased 6% to €33.05, Societe Generale SA fell €1.00 to €22.16 and Deutsche Bank declined 2.5% to €28.56.

ASML Holding N.V. decreased 0.1% to €28.17 and a day ago the semiconductor equipment maker said third quarter net income was €355 million.

Michelin SCA decreased 0.2% to €49.10, Fiat Industrial SpA rose 26 cents to €5.84 and Peugeot SA AG decreased 2.2% to €17.89.