European Markets Ease; Italy in Focus After Greek Flip-flop

Devan Biswas
04 Nov, 2011
New York City

Market indexes in Europe declined a day after rate cut and a cautious outlook from the central bank. Indexes were higher in the morning after Greece reversed its earlier decision to seek a referendum on the EU bailout. Commerzbank reported a loss on Greek bonds write-down.

[R]4:00 PM Frankfurt – Market indexes in Europe declined a day after rate cut and a cautious outlook from the central bank. Indexes were higher in the morning after Greece reversed its earlier decision to seek a referendum on the EU bailout. Commerzbank reported a loss on Greek bonds write-down.[/R]

European markets were on the defensive a day after the central bank lowered its key lending rate but also offered a cautious outlook on growth, inflation and on jobs market.

Market indexes in the region declined with Italy and Greece in focus. After a tumultuous day in Greece, investors focused on the fast developing consensus that a unity government will take a hold.

Prime Minister George Papandreou said he is prepared to step down after a confidence vote later today and form a unity government after the opposition party leader Antonis Samaras agreed to back the EU bailout package and its conditions.

Papandreou also confirmed the agreement with the opposition party leader to support the EU bailout. Antonis Samaras of the New Democracy also softened his stance against the EU deal and said he never rejected the deal with the EU but only the government’s handling of it.

However, his voting record in the last two years suggests otherwise. Greece is under heavy pressure from the EU to accept the bailout conditions and Prime Minister Papandreou is struggling to control the revolt in his own party and also the populous anger against the austerity measures.

Investors remained nervous and focused on Italy as Prime Minister Silvio Berlusconi face restive lawmakers next week. Italy agreed in principle the need to implement austerity measures in a letter written to G20 ministers at a meeting in France.

However, the yield on the Italian bonds increased 10 basis points to 6.3%, near the record level at the time of the creation of the euro.

The euro jumped up to $1.3804 after Greece tracked back from its announcement of a referendum.

In Paris, the CAC-40 Index fell 22.97 or 0.7% to 3,172.50 and in Frankfurt the DAX Index decreased 94.61 or 1.5% to 6,038.57.

The indexes in Stockholm gained 0.7%, in Madrid fell 0.7%, in Milan declined 1.5% and in Zurich edged down 0.1%. The index in Athens declined 0.3% and in UK traded flat.

Greece plans to sell €1 billion of 6-month T-bills on Tuesday next week to fund its need to rollover €2 billion short term debt that is maturing on November 11.

The short term debt market is the only source Greek government has to fund its operations and last month the debt agency sold €1.3 billion that yielded 4.86%.

Separately, G20 finance ministers meeting focused on increasing the available capital for the IMF.

European leaders in the past have resisted the calls of capital increase at the bank at the time of the Asian crisis.

Thirteen years ago French and German leaders were vocal about the crony capitalism in East Asian countries and cited internal reforms were more important in Indonesia and Thailand then the new loans from the IMF.

Gainers & Losers

Alcatel Lucent plunged 16% to €1.69 after the maker of telecom gear said that it plans to be free cash flow positive in 2012 after it burned through €1 billion in the nine months of this year.

Commerzbank declined 6.6% to €1.64 after the German bank reported third quarter operating loss of €855 million compared to €116 million a year ago quarter. The bank took a one-time charge of 52% on Greek debt that totaled €798 million.

The 25% state controlled German bank also said it will focus for new business only in Germany and Poland will not write any more business in the euro zone.

Commerzbank has €14.3 billion exposure to Italy and of which €7.9 billion to the government bonds that have been under pressure for the last six months.

The bank also withdrew its annual earnings guidance and said 2012 outlook is subdued.

The bank’s core capital ratio is 9.4% and needs to raise 2.9 billion to meet the revised higher capital required by the European Banking Authority.

Deutsche Bank AG fell 1% to €28.27, BNP Paribas SA fell 2.2% to €31.20 and Societe Generale SA declined 4% to €17.82.

Intesa Sao Paolo SpA decreased 7 cents to €1.11 and UniCredit SpA decreased 6 cents to 76.7 cents.

HSBC Holdings plc decreased 1.10 pence to 540.00 pence and Barclays fell 1.9% or 181.05 pence.

BMW AG decreased 4.2% to €58.06, Volkswagen AG fell 2.9% to €115.45 and Daimler AG declined 3.7% to €35.04.