Budgets from Spain and France in Focus as Sentiment Sours

Arthi Gupta
24 Sep, 2012
New York City

The European indexes edged lower ahead of draft budgets from Spain and France. Germany sold

[R]3:00 PM Frankfurt – The European indexes edged lower ahead of draft budgets from Spain and France. Germany sold €1.17 billion of short term debt as business confidence index drops for the fifth month in a row. CGGVeritas agreed to acquire Fugro’s Geoscience Division for $1.6 billion.[/R]

Financial markets in Europe turned down sharply after the German business confidence declined for the fifth month in a row in September as investors focused on Spain.

Prime Minister Mariano Rajoy is scheduled to present his draft 2013 budget on Thursday that will target more spending cuts and additional taxes.

Rajoy released his fourth set of measures in July since taking the reign of government in December that reduced wages, unemployment benefits and tax increase to cut the deficit by €65 billion.

Rajoy has previously mentioned that the government deficit in 2013 will be cut to 4.5% from 6.3% in the current year and increased the value-added tax to 21% from 18% in September 1.

Madrid is also expected to release the final assessment from investment consulting firm Oliver Wyman, on how much extra capital Spanish banks will need to maintain reserves deemed adequate by the European authorities. Wyman earlier had estimated as much as €60 billion which will be tapped from the €100 billion approved by the euro zone.

In addition, France is scheduled to release its 2013 budget on Friday and Finance Minister Pierre Moscovici said on Sunday that budget deficit will be cut to 3% of gross domestic product from the estimated 4.5% this year.

French Prime Minister Jean-Marc Ayrault said in an interview to a French news website Mediapart that Greece should be given more time to cut its budget deficit and implement the planned reforms.

Separately, the French President Francois Hollande and German Chancellor Angela Merkel are at loggerheads on the European Commission''s proposal for a single supervisory mechanism for banks in the euro zone under the European Central Bank.

Euro zone countries are planning to increase the size of the European Stability Mechanism to €2 trillion from the current €500 billion, Germany''s Der Spiegel reported on Sunday, citing a Finance Ministry spokesperson.

European Central Bank Executive Board member Benoit Coeure said on Sunday that “it is not absolutely obvious that another rate cut would be necessary in the light of recent economic indicators and in light of inflation developments.""

However he added that economic growth in the euro zone would be ""very weak"" this year and next and inflation will be “going down but at a relatively slow pace""

The central bank cut its main refinancing rate to a record low of 0.75% in July and had kept the key rate unchanged for the second time.

In Paris trading, the CAC-40 Index declined 38.75 or 1.1% to 3,492.17 and in Frankfurt the DAX Index edged lower 53.73 or 0.7% to 7,397.94.

The yields on Spain’s benchmark 10-year was little changed at 5.76%. Italian 10-year yields rose four basis points to 5.09%.

German Bond Auction

Germany sold €1.173 billion or $1.52 billion of 12-month Treasury bills, known as Bubills at an average yield of -0.0184% compared with -0.0246% at the previous auction on August 27.

The bid-to-cover ratio rose to 5.1 from 2 at the last auction on August 27.

CGGVeritas to Acquire Fugro''s Geoscience Division

CGGVeritas agreed to acquire Fugro’s Geoscience Division, excluding the existing Multi-Client library and nodes businesses. The gross amount of the transaction is €1.2 billion.