Euro Zone Nations to Fund

Devan Biswas
19 Dec, 2011
New York City

European markets gained as ratings agencies warn of downgrades in the region. Spain is expected to release steps to cut budget deficit by the end of the year and will encourage merger of banks. Euro zone ministers meet to finalize

[R]5:00 PM Frankfurt – European markets closed higher as ratings agencies warn of more debt downgrades in the region. Spain is expected to release steps to cut budget deficit by the end of the year and will encourage consolidation in the banking sector. Euro zone ministers meet to finalize €200 billion IMF funding that violates the spirit of EU charter.[/R]

European markets opened higher and struggled to hold on to the gains in early trading but managed to overcome the weakness in Asian markets.

Trading was light as investors focused on the holidays and took defensive positions in the food and consumer staples sectors.

In Frankfurt trading, DAX 30 index increased 28.79 to 5,730.57 and CAC 40 index added 25.38 to 2,997.68. Across the region, the benchmark index in Spain increased 1.3%, in Italy gained 0.8%, in Switzerland rose 0.6% and in Sweden added 0.1%.

Investors were generally cautious after Fitch Ratings on Friday placed French debt rating on a negative watch and said it may downgrade ratings of six other euro zone nations. Separately on Friday, Moody’s lowered Belgium debt rating by two notches with a negative outlook.

Bond yields in the euro zone were generally stable. Belgian 10-year bond yield increased 9 basis points to 4.42% and yields on similar bonds for Spain declined to 5.2% and for Italy fell to 6.8%.

Euro zone finance ministers attended a teleconference to finalize the details of €200 billion of commitment to increase IMF funding. The additional funding will help the multilateral institution to permit more lending to peripheral euro zone nations, even though that will violate the IMF charter and break the spirit of European Union treaty.

Spain Focuses on Budget Balance and Bank Consolidation

Recently elected Spain’s Prime Minister Mariano Rajoy focused on economic woes of the nation in his first address to the parliament as the nation slips into second recession in three years and export growth slows.

Rajoy said that Spain will need to raise €16.5 billion next year if the budget deficit meets its target of 6% in 2011. Most economists estimate the deficit to be at least 7% in the current year. He added that on December 30 specific steps to cut deficit spending and government hiring freeze will be announced.

He also announced tax incentives for small businesses that hire young employees and moved public holiday closer to end or the beginning of the week to discourage people from taking more time to stretch the holiday.

Rajoy also said that banks will be asked to recapitalize and consolidate after they have sold off properties worth billions of euros to meet the revised guidelines of recapitalization.

Stock Movers

Banks in the euro zone traded higher despite the possibility of another downgrade as early as this week from at least two ratings agencies.

BNP Paribas SA increased €1.18 to €28.92, Credit Agricole SA added 4 cents to €4.09 and Deutsche Bank gained 18 cents to €27.38.

Automotive stocks were higher and Volkswagen said its Audi unit is expected to sell more cars in 2012.

Volkswagen AG increased €1.35 to €104.55, Daimler AG decreased 22 cents to €31.55 and Peugeot SA increased 4 cents to 11.85. BMW AG increased 18 cents to €50.17.