European Indexes Surge 3.1%; Italian Bond Yields at 7.1%

Arthi Gupta
28 Nov, 2011
New York City

European markets soared on the expectations of new bond offering from Northern European nations that will provide financing to the troubled nations in the region. Moody

[R]1:00 PM Frankfurt – European markets soared on the expectations of new bond offering from Northern European nations that will provide financing to the troubled nations in the region. Moody’s lowered the credit rating of Belgium by one notch.[/R]

European markets soared more than 3% on the hopes that Northern European nations may band together and issue bonds that will provide additional funds to struggling nations of the euro zone.

The rumors were denied by the German government sources and Chancellor Angela Merkel reiterated her opposition for the euro bonds.

However, the debt crisis continues to fester and Belgium was the latest victim of the credit rating downgrade. Last week sovereign debt ratings of Portugal and Hungary were lowered.

The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns, cautioned Moody''s Investors Service today.

Market indexes soared on a speculation that the German government is considering issuing “elite bonds” with France, Finland, Austria, Luxembourg and Netherlands to help highly indebted euro region members, newspaper Die Welt reported on Monday, citing unidentified EU diplomats.

The economies with lower credit ratings would be initially excluded from the issue, the newspaper said.

The bond issue is intended to stabilize the AAA rated nations and building a firewall to calm financial markets, the report said. The interest rate for the bonds is seen between 2% and 2.5%.

However, German government sources denied the move and the European Central Bank officials highlighted that member nations must abide by their obligations to balance their budgets and keep the debt levels below the 60% mandated by the European regulators. At present not one nation has debt-to-GDP ratio that meets the EU requirements.

S&P Downgrades Belgium

Standard & Poor''s on Friday lowered the long-term sovereign credit rating of Belgium by one notch to ""AA"" from ""AA+"", citing renewed funding and market risk pressure and said outlook for the rating is negative.

The country’s yields on long-term bonds are hovering near 6% and not far from 7% level that forced several euro zone nations to seek a bail out.

The downgrade has spurred Belgium’s political factions to an agreement on a budget for 2012 that includes plans to cut €11 billion from spending next year and liberalize labor regulations.

But trade unions have called the budget ""unbalanced"" and ""unfair"", vowing to take to the streets at the end of this week.

In another report, Moody''s cut Hungary''s government bond rating by one notch to Ba1, below investment grade, with a negative outlook.

The International Monetary Fund is preparing €600 billion financial assistance for Italy to support the country if the debt situation worsens, La Stampa reported on Sunday. Italy would pay an interest rate of 4% to 5% on the loan, the newspaper said. However, the IMF spokesperson denied the media reports.

Italy sold €567 million of bonds due September 2023 at a yield of 7.3% with the bid-to-cover ratio of 2.16.

Italian 10-year bond yields fell 16 basis points to 7.11%.

In Paris trading, the CAC-40 Index gained 99.65 or 3.5% to 2,956.62 and in Frankfurt the DAX Index added 166.60 or 3.1% to 5,659.36.

Euro-area finance ministers are to meet in Brussels tomorrow to discuss measures to contain the debt crisis.

Italy''s Prime Minister Mario Monti is expected to unveil plans for accelerated reform at the meeting. Monti is set to propose more austerity measures this week to balance the country’s budget by 2013.

Banks rose after reports suggested the finance chiefs are discussing the possibility that the EFSF could insure the bonds of debt-ravaged euro area countries, with guarantees of 20% to 30%.

Deutsche Bank gained 6.9% to €26.51, Societe Generale jumped 5.1% to €16.64 and UniCredit added 4.3% to €0.73.

Leaders of Germany, France and Italy have ruled out a bigger role for the ECB in tackling the region’s sovereign debt crisis stating that they respect the independence of the ECB and won’t urge it to tackle the sovereign debt crisis.

""Euro bonds are not needed and not appropriate,” Merkel said yesterday at the press conference with Monti and Sarkozy in Strasbourg, France.

German Finance Minister Wolfgang Schaeuble called for fast-track treaty changes to tighten budget discipline.

“The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that,” Schaeuble was quoted as saying in an interview with ARD television in Berlin yesterday.

Euro-zone M3 Growth Eases

Euro-zone annual growth rate of the broad monetary aggregate M3 eased to 2.6% in October, from 3% in September, the European Central Bank said in a report on Monday.

Gainers & Losers

Aryzta AG soared 3.6% to Sfr41.55 after the Swiss specialty baker reported first quarter group revenue of €1 billion, up 3.9% from last year. Total food group revenue improved 9.6% to €692.6 million.

Axa SA climbed 8.5% to €9.60 after a broker upgrade.

BHP Billiton Ltd. rose 2.4% to A$34.85 after the diversified natural resources company said its Group Executive and Chief Financial Officer Alex Vanselow would retire from the company at the end of February 2012 and succeeded by Graham Kerr, President of Diamonds and Specialty Products.

BNP Paribas S.A. surged 7.9% to €27.90 after the French global banking group is mulling a sale of more than $700 million private equity portfolio, in efforts to shrink balance sheet and bolster capital base, the Financial Times reported on Sunday, citing people close to the situation.

IKB Deutsche Industriebank AG increased 1.9% to €0.48 after the banking company, reported first-half consolidated net loss widened 26.7% to €312 million versus loss of €246.2 million last year. Net interest income grew 8.6% to €75.8 million from €69.8 million in the prior-year period.