For Europe, Every Day Is A New Adventure

By: John Rubino | Thu, Jan 12, 2012
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Europe's parade of surreal financial news just keeps coming. This week, investors are paying Germany to take their money by accepting negative interest rates on new government debt:

Germany Issues Bills With Negative Yields As Economists Agree Country Is In Recession

Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before.

As per the FT: "German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas...The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday."

Still the fact that the ECB deposit facility, already at a new record as pointed out previously, is not enough for banks to parks cash is grounds for alarm bells going off: the solvency crisis in Europe is not getting any easier, confirmed by the implosion of UniCredit which is down now another 11% this morning and down nearly 50% since the atrocious rights offering announced last week. On this background Germany continues to be a beacon of stability, yet even here the consensus is that recession has arrived. As Bild writes, according to a bank economist survey, Germany's economy is expected to shrink in Q1, with wage increases remaining below 3%. And as deflation grips the nation, potentially unleashing the possibility for direct ECB monetization, look for core yields to continue sliding lower, at least on the LTRO-covered short end.

And big European banks are borrowing from their corporate customers rather than lending to them:

Banks Turn Borrowers, Seek Cash from Customers

European banks have found a new way to bring in cash. They borrow it -- but instead of turning to each other to bring in funds, they are borrowing it from companies that were once happy to deposit their excess cash in exchange for interest. Worries over the eurozone crisis have hit both the banks and their former depositors, and now both have worked out a new arrangement that seems to satisfy them both -- at least for now.

Reuters reported Monday that banks, wary of borrowing from one another or a central bank over debt fears, have begun negotiating secured lending arrangements with companies flush with extra cash -- which, instead of receiving a regular unsecured interest payment in exchange for their money, now insist on collateral and other measures in so-called repo deals or short-term secured lending.

While companies themselves are reluctant to talk about such measures, one source said that in one specific category of lending, companies account for 25% of these deals. Very large companies with an abundance of cash are typically the ones that will execute such arrangements. Johnson & Johnson, Pfizer and Peugeot are reported to be among them, as some of the most recent entrants into the repo field.

These two events are clear signs of a stressed system. But they're not an immediate threat to anyone's portfolio. That will come when the peripheral Euro-zone countries start refinancing their sovereign debt. On Thursday and Friday, for instance, Spain and Italy have to convince the markets to lend them a total of almost 20 billion euros:

Spain tests demand for weaker euro zone states' bonds

MADRID, Jan 12 (Reuters) - Spain will provide 2012's first real test of demand for debt from the euro zone's bruised periphery on Thursday when it sells around 5 billion euros ($6.39 billion) of bonds.

Italy will also venture into markets with a short-term debt sale before embarking on this year's massive campaign of bond issuance at an auction on Friday.

The two countries are among weaker euro zone states scrambling to convince markets they can slash their deficits while somehow also stimulating growth and creating jobs and are seen as especially vulnerable should the debt crisis escalate.

Spain's Treasury will auction a new three-year benchmark bond and reopen two bonds each maturing in 2016, in a sale that is expected to attract substantial support from domestic banks flush with European Central Bank cash.

"The massive size of the three-year lending from the ECB reinforces the view that auctions should be supported by domestic investors," said BNP Paribas strategist Ioannis Sokos.

A Treasury bill sale will meanwhile give Italy a first taste of investors sentiment before it auctions up to 4.75 billion euros of bonds on Friday.

Rome is scheduled to sell 8.5 billion euros in 12-month BOT bills and 3.5 billion euros of bills maturing at the end of May.

Italy must refinance more than 90 billion euros of longer-term bonds falling due between February and April, and with no end in sight to the European debt crisis, its bonds remain under intense pressure, with yields at levels viewed as unsustainable.

The European Central Bank has pumped so much liquidity into the system that this week's debt sales will probably succeed without rattling the markets too much. But that 90 billion euros Italy has to roll over between February and April will make every day a new adventure.



John Rubino

Author: John Rubino

John Rubino

John Rubino

John Rubino edits and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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