Veritas – A worse day for European sovereigns

Spain and France managed to sell more government bonds today, but the signs were growing of the eurozone financial crisis returning to haunt the markets.

Yields on Spanish long term debt rose compared to the last auction of similar debt in January, reports Reuters. Earlier this week, yields on the country’s 10-year debt rose to their highest levels since early December 2011. France’s auction today of its BTAN and OAT bonds were priced at yields of 0.85% and 1.06% respectively.

However, the apparently successful auctions mask significant ongoing problems, particularly in Spain. According to Reuters‘ figures, the portion of foreign owned government bonds has dropped to 42% in February from 50% in December 2011. Spanish banks are buying the bonds using the cheap money obtained from the ECB’s LTRO programme.

Yesterday, one of the ECB’s senior policymakers and head of Germany’s Bundesbank Jens Weidmann said that Spain should not look to his institution as a source of demand for Spanish government bonds.

France meanwhile has seen rumours surface again that a further credit rating downgrade could hit its debt. This may be linked to polls and predictions around the upcoming first round of the presidential election this coming Sunday. Sitting president Nicolas Sarkozy looks less secure according to some more recent analysis, which could unsettle markets, as chief challenger, the Socialist Party candidate Francois Hollande, has made no secret of his desire to squeeze more money out of the financial sector to fund government spending as well as reject parts of the eurozone rescue deal stitched up with German chancellor Angela Merkel last year.

US billionaire hedge fund manager John Paulson has been reported by Bloomberg this week as adopting a strategy of shorting eurozone government debt, and has been buying more insurance against defaults, or CDS contracts.

The eurozone seems far from being in the clear on issues of sovereign debt. And as if to emphasise the possibility of a lapse into a period of even deeper financial crisis, consider the following news out of Germany’s crucial automobile and chemicals sectors.

Car making globally could be halted because of a fire at a plant in Germany accounting for up to half the world’s production of a chemical used to create a resin in turn used for brake and fuel lines. Revenues from Germany’s car makers accounted for more than 10% of the country’s GDP as recently as 2007, according to the European Automobile Manufacturers Association, citing Eurostat. Every seventh job in Germany directly or indirectly depends on its car makers.

The industry’s response? German car maker Audi yesterday went ahead with its acquisition of Italian motorcycle maker Ducati, which last year reported Ebitda of about €51m on its sales of around 40,000 motorcycles, according to Reuters. Compare that to Honda’s motorcycle sales estimated at around 16 milion units.

Why does this matter? Because, should Germany’s economy suffer a significant dent from a collapse in vehicle manufacturing and exporting, then it could raise the possibility of its credit rating coming under threat as government revenues fall. That in turn could threaten the implied credit rating of the ECB, thereby causing untold problems for Europe’s financial system.


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