Euro-Zone Debt Auctions Yield Mixed Results

As Global stock markets recover from the sudden volatility of the last few weeks, the Euro-Zone nations have been tapping into the bond markets to raise funds to finance their growing budget deficits and maturities on the external debt.

Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.

Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524%  versus 1.492%  ahead of the auction.  However, it remained near a record low of 1.402%  reached on Tuesday. 

Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.

Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.

Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.

Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.

The yield on Spain’s 6-month bill rose to 1.32%  compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7%  from 0.549% .

In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.

The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74%  and 7-year bonds at an average yield of 2.305%

The debt problem is hardly unique to Europe.  The United States is also facing a massive budget deficit and very onerous levels of external debt.  In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control.  Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.

Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is.  Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.

Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy.  Japan, is the highest among the G-20 with a ratio well in excess of 200%.

The proposed solution to the deteriorating situation has been to raise more debt.  Would anyone propose assisting a cocaine addict by giving them more cocaine?  As a result, the liklihood that the debt problem will be fixed is NIL.  The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.

Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets.  This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.

Marko's Take

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