Northwest Arkansas Democrat-Gazette
Fears for banks, France revive jitters
PARIS — Worries about Europe’s debt crisis returned Thursday after a brief respite, as bank stocks fell sharply on worries about losses on government debt and a French bond auction drew lackluster demand from investors.
Financial stocks slumped as it became clear banks would have trouble raising billions in new capital in coming months. In Italy, trading in Unicredit shares was halted after they lost a quarter of their value since Wednesday morning, when the bank admitted it had to offer huge discounts to investors to attract new capital.
The banks need the money to cover potential losses on government debt, whose value has plummeted across most of Europe in recent months on fear of defaults. Many countries in the region have to roll over billions in debt in coming months, putting market focus on government bond auctions.
France managed to raise $10.31 billion on Thursday, at the top of its goal, in an auction where demand was solid but far less than at the last sale in December. The borrowing rate for the 10year bonds, which made up more than half of the auction amount, rose to 3.29 percent from 3.18 percent last time.
The country is under close scrutiny since ratings agencies warned they could strip it of its top AAA grade because of the impact of the crisis, and a looming recession, on its public finances.
Thursday’s bond auction shows that investors are still willing to lend to France at good rates but that they remain cautious. France’s banks are burdened with huge amounts of government bonds from weak countries such as Greece, and assisting them with state money could be expensive — and possibly trigger a downgrade for France.
Formerly routine affairs, European government bond auctions have become tense ordeals during the crisis. Countries that cannot raise money at reasonable rates must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so- called European “core” could join that ignominious club. Thus far, only the relatively small economies of Greece, Ireland and Portugal have sought bailouts.
At the very least, if countries with larger economies such as France are forced to pay more to borrow money, they may become unwilling — or unable — to support their smaller neighbors.
After weeks of watching the bond yields of Italy, France and Spain rise, investors saw a small pause this week. Germany and Portugal both sold bonds Wednesday at lower rates than previous auctions.
But Hungary, a noneuro member of the EU, saw its borrowing rates jump higher in a bond sale of its own. The country’s tense financial situation has deteriorated in recent weeks, pushing it to accept negotiations for a standby loan from the International Monetary Fund.
The bad news helped weaken sentiment in European markets, pushing the euro to $1.2836, a 15-month low against the dollar.
On the secondary market, where the issued bonds are later traded openly, the yield on French 10-year bonds was stable Thursday at 3.31 percent after the auction.
But yields of Italian and Spanish bonds were on the rise. Both countries are considered too big to bail out, so signs that investors might avoid their bonds are particularly worrying. Italy’s yield rose above the psychologically sensitive level of 7 percent — a level which is considered unsustainable in the longer term.
European financial stocks were hit hardest on Thursday. To protect banks against losses on government bonds, European governments are forcing them to keep more safe capital on hand. But raising that money has proved tricky for some, since investors are reluctant to buy their stock or bonds.
Italy’s largest bank, UniCredit, announced Wednesday that it would offer stock at a 69 percent discount to raise cash — a disturbing sign of just how pressed banks are.
More bad news came Thursday, when the Financial Times reported that Spain’s government thinks its banks will have to raise $64 billion more than previously thought. That news sent Spanish bank stocks tumbling and contributed to losses in other countries.
The continued volatility in markets is another sign that investors don’t put much stock in the “solutions” unveiled at a summit last month that committed governments to a new treaty that would give European bureaucrats substantial oversight of their budgets.
Leaders hoped to reassure markets that overspending would never again threaten state solvency, but investors have noted that it does nothing to resolve the immediate crisis — the heart of which is rising bond yields — and is unlikely to ever be enacted as strongly as it was conceived anyway.
Instead, they want the European Central Bank to step in more forcefully to drive down borrowing costs by buying bonds in the open market, a practice it engages in only modestly now. Analysts argue that would give governments time to enact longer- term solutions. For now, governments can only slash spending to woo markets, but that also cripples already anemic growth and threatens to usher in a new recession.
Despite these challenges, French Prime Minister Francois Fillon promised on Thursday that France would encourage growth by reducing the taxes that companies pay on salaries, in the hopes of driving down the unemployment rate, which stands at 9.7 percent ahead of presidential elections this spring.
“What do all of the reports on France’s competitiveness tell us today? That the cost of work is too high in our country,” he told a conference at the French Finance Ministry.
With mounting government debt, France needs to make the shortfall up somewhere else, and Fillon said it would do so with a new sales tax and by taxing financial transactions.
The latter is controversial since many have argued it will only work if applied across the European Union or even the world. Britain and the U.S. — both of which are major centers of finance — have strongly resisted it.
Fillon vowed France would push ahead.
“It’s normal that all sectors participate in a collective effort, including the financial sector,” he said.