Spanish and Italian borrowing costs surged at auctions on Tuesday as investors were increasingly concerned about the outlook for the eurozone ahead of a crucial summit of EU leaders.
The crisis took another turn for the worse yesterday with Cyprus emerging as the fifth nation to seek a bailout from the EU. Earlier on Monday, Spain made a formal request for aid to support its ailing banking sector.
However, an unimpressed Moody's downgraded 28 Spanish banks later on Monday, citing the reduced creditworthiness of the Spanish sovereign, and the expectation that the banks' exposures to commercial real estate would likely cause higher losses.
The Spanish Treasury raised EUR 3.08 billion from the sale of its 3- and 6-month bills. The target set for the auction was between EUR 2 billion and EUR 3 billion.
The agency sold EUR 1.60 billion of the 3-month paper and EUR 1.48 billion of the 6-month debt. The yield on the 3-month debt shot up to 2.362 percent from 0.846 percent at a previous sale on May 22. The country paid 3.237 percent for the 6-month funds, which was much more than the 1.737 percent in May.
Meanwhile, the bid-to-cover ratio for the 3-month T-bill fell to 2.60 from 3.95 in May. The ratio reflects demand for the debt. Investors bid 2.80 times for the 6-month bill, down from 4.30 times in the previous sale.
Italy's cost of borrowing also increased on Tuesday amid growing concerns whether the country would be the next in line to seek a bailout.
The Italian Treasury raised EUR 2.99 billion from the sale of its zero coupon May 2014 bonds, broadly in line with the maximum target of EUR 3 billion. The auction attracted bids totaling EUR 4.94 billion.
The yield on the zero interest debt rose to 4.712 percent from 4.037 percent in the previous sale on May 28. The bid-to-cover ratio, which reflects demand, dipped slightly to 1.65 from 1.66.
The agency also sold EUR 625.5 million of its 2.10 percent September 2016 inflation-linked bonds against the maximum target of EUR 1 billion. The yield on the debt climbed to 5.20 percent from 4.39 percent in the previous tap on May 28. Investors bid 2.22 times the offer compared to 2.29 times in the May sale.
The country also placed EUR 289.5 million of its 3.10 percent September 2026 inflation-indexed bonds, which was first issued in June last year via a syndicate of banks. The maximum target set for the sale was EUR 1 billion. The yield was 5.29 percent and the bid-to-cover ratio 2.43.
European Union leaders are set to hold a summit on Thursday and Friday in Brussels. Discussions on various ways to tackle the crisis including Eurobonds, Eurozone banking union and a growth pact, are likely to be held. However, Germany is expected to oppose any move towards more integration.
"For Germany, possible first concessions could be a single European/Eurozone bank supervision and a Eurozone redemption fund," ING Bank Economists Carsten Brzeski said yesterday.
"Most other countries would have to embrace the idea of more political integration and a loss of national sovereignty."
Brzeski expects this week's summit to at least outline the basic principles of a more integrated Eurozone. Combined with a growth compact, the EUR 130 billion growth initiative and maybe even some short-term liquidity band-aid, this could be sufficient to at least convince the ECB to take action again, he added.
It is also expected that there will be discussions on making changes to conditions of the Greek bailout. Political uncertainty is still a concern as the new finance minister of the country resigned on Monday citing ill health. With the election of a new government, the risk of 'Grexit' has been avoided only for the near term, but it remains a threat beyond that.
The Cypriot request is also likely to be considered during the summit. The nation is seeking aid to to shore up its banks struggling from huge exposure to the debt-ridden Greece. Previously, Ireland, Portugal, Greece and Spain have sought EU bailouts.
by RTT Staff Writer
For comments and feedback: firstname.lastname@example.org