Investors shift fears on debt to Spain, France

Borrowing costs reach high levels

November 18, 2011|By David Jolly, New York Times

Investors have hailed Italys new prime minister, Mario Monti, left, who… (Alessia Pierdomenico/Bloomberg News)

PARIS - Italy, the third-largest economy of the euro bloc, has spent days struggling in the market spotlight. Yesterday, however, investors turned their attention to the number two, France, and number four, Spain, whose borrowing costs spiked during the day.

Spain auctioned about $4.8 billion in 10-year debt but had to pay 6.97 percent - the most since 1997, before the advent of the euro, and well above the 5.43 percent it paid at a comparable auction in October.

Borrowing costs above 6 percent are considered dangerously high, and at 7 percent are considered unsustainable over the longer term, as interest payments crowd out other spending.

France paid 2.8 percent to sell bonds maturing in July 2016, up from the 2.3 percent in October, and the spread between 10-year bond yields in France and Germany, a measure of market confidence, widened to more than 2 percentage points, the widest since the creation of the euro more than a decade ago.

Market intervention by the European Central Bank helped turn around the eurozone bonds, however, and yields fell for the day. By the close of trading in Europe an investor who bought the Spanish securities - for which the yield fell to 6.42 percent on the secondary market - would have made money.

Charles Diebel, head of market strategy at Lloyds Banking in London, said investors had taken heart for the eurozone’s prospects from Italy’s new prime minister, Mario Monti, who promised tough action yesterday to restore the country’s finances. Italy’s 10-year borrowing costs fell back slightly yesterday to 6.79 percent.

“We don’t have much in the way of detail yet,’’ Diebel said, “but Italy’s making all the right noises.’’

The markets wobbled as Chancellor Angela Merkel’s government in Germany again refused to back the kind of strong action - like the issuance of joint eurozone bonds and making the European Central Bank a so-called lender of last resort for governments - that many economists say is essential to halting the eurozone sell-off.

France is also seeking Merkel’s support for using the central bank to bolster the European Financial Stability Facility, the main eurozone bailout vehicle.

“I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,’’ Bloomberg News quoted Merkel as saying in a speech. “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.’’

Monti, Merkel, and President Nicolas Sarkozy of France spoke yesterday, and, in a joint statement, agreed on the need to accelerate previously agreed-upon measures to ensure financial stability and growth in the eurozone, Reuters reported.

The British prime minister, David Cameron, is scheduled to go to Berlin today for talks. Britain, a European Union member that does not use the euro, has become increasingly worried about the repercussions from the crisis on its own economy.