For a second day running, market concern has centered on the state of the banks following UniCredit’s announcement Wednesday that it was selling new shares at a 69 percent discount to Tuesday’s closing price.
Italy, the recent focus of the debt crisis, must borrow to cover €53 billion ($69 billion) in expiring debt in the first quarter alone in debt auctions beginning Jan. 13. That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.
Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy. That’s why regulatory authorities want Europe’s banks to raise their buffers by €115 billion (149 billion) over the next few months. The worry in the markets is that banks will have to offer sharp discounts.
The economic slowdown will also keep pressure on lenders in Europe. Spain’s economy minister told the Financial Times he expects the country’s banks to have to set aside another €50 billion in provisions to cover the costs of bad property loans. The comments caused Spanish banks stocks to slide and contributed to losses in other countries.
“The Unicredit rights issue proving that recapitalising banks via the normal route will be exceedingly difficult, if not impossible,” said Louise Cooper, markets analyst at BGC Partners.
Most of the attention over Europe’s debt crisis centers on how governments raise cash.
France became the latest euro country to sell off a large chunk of bonds in a relatively troublefree manner, though its borrowing rates edged up and demand slipped from earlier auctions. France’s bond markets are a particular focus for investors because credit ratings agencies have threatened to cut the country’s cherished triple-A rating.
In total, France sold €7.96 billion ($10.31 billion)of its bonds at affordable rates. Of the issues on offer, most interest centered on the €4 billion in ten-year notes, for which the results were mixed. It had to pay a rate of 3.29 percent, up from December’s equivalent rate of 3.18 percent, and demand was lackluster — the bid to cover ratio, a gauge of investor demand, was only 1.643 as against 3.046 last time.
Germany had also seen a drop in demand for its bond issues this week, with demand for €4.06 billion of its ten-year bonds issued on Wednesday only barely covering what was on offer.