E.U. Countries Find Relief in Bond Market
Thursday, July 22, 2010
Spain, Ireland and Greece successfully tapped bond markets on Tuesday in a sign that European efforts to calm an immediate crisis over government debt have taken hold.
The three countries are considered among the most vulnerable of the 16 nations that use the euro, with high levels of government spending and weakened economies. Greece approached default in the spring and is now operating under a joint rescue from the European Union and the International Monetary Fund. Borrowing costs for other countries had risen amid concern that they, too, might struggle to pay their debts.
But the promise of a trillion-dollar contingency fund for euro-zone countries, extended by the E.U. and the IMF in May, has allowed those nations to raise money as needed. Interest rates remain comparatively high -- Ireland will pay interest of more than 5.5 percent on the roughly $1 billion of 10-year bonds it sold on Tuesday, nearly three percentage points more than benchmark German bonds.
Yet demand at that price was high, with investors offering to buy three times the amount of debt that Ireland offered. The successful sales add to evidence that a brewing crisis over sovereign debt in Europe has abated -- at least for now, and at least within the euro zone. Since the emergency fund was approved, the euro has climbed from below $1.20 to around $1.28.
But in the longer term, prompted by their high levels of debt, several of the countries are struggling to slash programs and services, and to overhaul basic aspects of their economic policy. In a recent research note, Barclays Capital characterized Spain as "solvent with risks" -- able to manage its debt load for now, but perhaps facing a need to raise tens of billions of dollars to recapitalize a weakened banking system, and still facing the brunt of a sharp reduction in government spending. Ireland enjoyed stronger-than-expected growth in the first part of the year as its exports rebounded, but a "fiscal squeeze" caused by public-sector pay cuts and other reductions has diminished domestic demand so much that the economy is still expected to contract over the full year, according to a recent analysis by Capital Economics' Europe economist Ben May.
Outside the euro area, risks may be even higher. Hungary on Tuesday was unable to raise as much as it had hoped in a bond issue, after a breakdown in talks with the IMF over the weekend raised new questions about the country's willingness to follow through with an economic turnaround plan. The country received access to $20 billion in aid from the IMF, the E.U. and the World Bank in 2008 as investors turned from the country and the recession hit. The IMF conducts periodic reviews on its loan programs to see if the countries involved are living up to their commitments. Over the weekend, the fund said that Hungary had made progress but that "more needs to be done" to control deficits and retool money-losing, state-owned businesses.
"While there is much common ground, a range of issues remain open," the IMF's head of mission in Hungary, Christoph Rosenberg, said in a statement announcing that an IMF group had ended talks with Hungarian officials without agreement on possibly extending the rescue plan. Hungary's bailout was seen as one of the successes in the IMF's response to the global financial crisis, but a change of ruling party in the recent elections has complicated relations between the country and the fund. An incoming government official said the country was approaching bankruptcy, while new leaders have been hesitant to meet all the terms agreed to by their predecessors.
Labels: Asian Bonds, EU Countries
posted @ 10:21 AM,
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