Crisis of Confidence in Europe; Yields Rise in Italy, Spain, Holland, Belgium

Devan Biswas
15 Nov, 2011
New York City

Confidence crisis deepened as bond yields continue to rise for Italy and Spain. The fear in the euro zone reached more nations after sovereign yields rose for bonds of Belgium, Holland and Austria and French bond yield spreads to German bunds soared to a 20-year high.

[R]6:00 PM Frankfurt – Confidence crisis deepened as bond yields continue to rise for Italy and Spain. The fear in the euro zone reached more nations after sovereign yields rose for Belgium, Holland and Austria and French bond yield spreads to German bunds soared to a 20-year high.[/R]

European markets sentiment took a turn for the worse as market jitters continue in the region.

The market sentiment was also on the defensive after the latest economic sentiment survey from the ZEW showed that the index declined 6.9 points in November to -55.2 points. The monthly decline was the ninth in a row and the lowest since financial crisis in October 2008.

A separate report from the statistics agency eurostat showed that the economy expanded at 0.2% in the European Union.

Most of the stress in the market is visible in the bond market and yields on the Italian and Spanish bonds rose for the second day in a row. And the debt stress widened to include more sovereign bonds.

The yield on 10-year Italian bonds increased 30 basis points to 7% and similar yields on Spanish bonds increased 20 basis points to 6.25%.

However, the fears in the bond market spread to France, Belgium and Holland. The yield on 10-year French bonds increased 20 basis points to 3.6% and Holland bond spread to German bunds rose to the highest since 2009.

Belgian and Austrian bonds yields spreads also rose to a 10-year high. Belgium sold €2.725 billion of debt with 3-months bills yielding 1.575% and 12-month note yielding at a 3-year high of 3.39%.

French bond yield spread to German bund rose to a 20-year high at 1.89%.

The euro declined 0.7% to $1.352. Investors worry that the region’s leadership faces a difficult choice of either letting the European Central Bank act as a lender of last resort and lend directly to nations or allowing the struggling nations like Italy, Greece and Portugal to leave the currency bloc.

Separately, CDU, the party controlled by the German Chancellor Angela Merkel voted to permit nations to leave the euro zone and still stay in the European Union. The vote came late last night that may facilitate the shrinking of the euro zone.

The bond market was on the edge and Spain completed the sale of debt at a steep cost. The Treasury sold €3.2 billion of short term securities that barely met the requirements of the auction.

The 12-month bills were sold at an average yield of 5.022% compared to 3.61% and 18-month securities that yielded 5.159% compared to 3.8% yield at the last month’s auction.

The yields have been on the rise especially in the last month and there is no sign of the abatement in the market sentiment.

In Paris, the CAC-40 Index declined 47.38 or 1.5% to 3,061.57 and in Frankfurt the DAX Index edged lower 41.58 or 0.7% to 5,943.44.

Market indexes in Stockholm and Zurich edged up 0.1%, in Milan declined 0.3%, in Athens fell 1% and in Madrid dropped 1.5%.

The pressure on Greece was ratcheted up after European Commission spokesperson Amadeu Altafaj asked written assurance from both parties in implementing reforms and lowering debt.

He went on to add, “It has to convince” European partners of Greece and “there is a strong commitment” and that will be “followed by decisive action by all political forces” regardless of the “outcome of the future elections in Greece.”

Greece is looking to get next tranche of bailout of 8 billion from the euro zone and the International Monetary Fund in the next five weeks.

Prime minister designate Mario Monti held talks with leaders of PdL and Democratic Party today and is expected to form his government as early as tomorrow.

Monti won the support of the leader of the center-right PdL party and the secretary Angelino Alfano told reporters after a meeting with him, “We think that the efforts of Professor Monti are expected to have good results.”