Eurozone Crisis: Fear Still Stalks Market Ahead Of Italian Auction
Investors continued to sound alarm bells over the eurozone on Friday after Thursday saw the euro slump to its lowest level in 16 months against the dollar and the pound.
Data released on Friday showed that consumer confidence in the eurozone fell to a two-year low in December; that the jobless rate was at a record 10.3%; and that retail sales fell 0.8% in November.
Banks once again deposited record amounts of money at the European Central Bank (ECB). The ECB pays far lower interest than the interbank markets, so the scale of deposits there is an indication that private sector institutions are losing faith in each other.
Renewed debate over whether or not the 50% haircut on Greek debt agreed at a summit last October will be enough to get the country on track to regain solvency further undermined confidence, as the country prepares for negotiations with the "troika" of the European Union, International Monetary Fund (IMF) and ECB.
German Chancellor Angela Merkel meets with her French counterpart Nicolas Sarkozy on Monday to discuss plans to move the currency union towards tighter fiscal and economic integration. Few expect anything groundbreaking to emerge from the talks.
The real test for policymakers and markets will be Italian and Spanish debt auctions, which will show the extent to which investors believe that 2012 could see a turnaround in the eurozone's fortunes.
At the end of December, Italy saw yields on its 10-year bonds slip below 7% in an auction of €7bn of debt, signs of a marginal improvement in sentiment. However, the news flow out of Europe has been mostly negative in 2012 - with the sole exception of better-than-expected German unemployment data - and many investors shied away from buying French bonds on Thursday.
Hungary, outside the eurozone, also saw a shortfall in its bond auction, and yields on the debt it could sell rose to over 9.5%. Debt yields in Portugal and Ireland also remain high. After the Christmas holidays, it seems that investors have remembered what this could mean.
"It is intuitive that, unless these weaker countries can grow their economies fast enough to repay debt rates at these levels despite being part of the eurozone, their situations are unsustainable," Mike Franklin, head of investment strategy at Beaufort International Associates, said in an email to the Huffington Post UK.
"While fears of disorderly Government default haunt the region, funding problems in the banking sector, where banks have often been under pressure to add Government Debt paper to their balance sheets, are reflected in the current difficulties being experienced by Italian bank group, UniCredit.
Unicredit's shares were temporarily suspended after losing more than 35% of their value in the first three trading days of the year. On January 3, the bank announced a €7.5bn rights issue - at a 43% discount - as it attempts to build its capital buffers in order to better insulate itself from future shocks.
The bank is a major holder of Italian bonds, and is understood to be heavily exposed to any potential restructuring of peripheral eurozone debt.
In the longer term, investors will be looking to a European summit at the end of the month for any concrete progress on the various bailout mechanisms and fiscal restructurings that were agreed in principle at December's crisis summit.