Bloomberg News

Italian Yields Jump as Papandreou Fights to Skirt Default

September 12, 2011

(Updates with Greek budget deficit in fifth paragraph, markets throughout. Click here to see a Greek timeline for the rest of 2011.)

Sept. 12 (Bloomberg) -- Italian bond yields surged at an auction today and Greek Prime Minister George Papandreou failed to reassure investors that his country can avert default as the euro region’s debt crisis worsened.

Italy sold 12-month bills today to yield 4.153 percent, up from 2.959 percent a month ago as demand fell. The yield on Greece’s two-year note surpassed 60 percent for the first time after the government said it would raise property taxes to meet the 2011 deficit goal in its European Union-led rescue.

Papandreou is struggling to convince investors that Europe’s most-indebted country can avoid a default that threatens to roil the euro region. That’s undermining European leaders’ efforts to stop contagion from spreading to Spain and Italy as splits emerge in the German government about how best to handle Greece.

“We have got to the stage when markets have lost an enormous amount of faith with the euro project as a whole,” said Marc Ostwald, strategist at Monument Securities Ltd. in London.

Papandreou’s pledges to meet the deficit target was undermined by data released today showing the central government’s budget gap widened 22 percent in the first eight months as austerity measures deepened a three-year recession. The government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission.

Safe Haven

Rising concern about a Greek default prompted stock investors to dump shares of banks, the biggest holders of Greek debt, and buyers of fixed income to take refuge in the safest European bonds. The euro slipped to its lowest level against the yen since 2001. Investors are valuing European banks at levels not seen since the depth of the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. and yields on Europe’s AAA-rated countries fell to record lows today.

BNP Paribas SA, Societe Generale SA and Credit Agricole SA plunged more than 9 percent today after two people with knowledge of the matter said Moody’s Investors Service may cut their ratings. The yield on Germany’s 10-year government bond fell as low as 1.701 percent.

Post-Lehman Lows

A Bloomberg index shows 46 lenders trading at 0.56 times book value, the cheapest since the post-Lehman lows of March 2009, signaling investors estimate their net assets are worth less than the companies claim and are demanding discounts for perceived risks.

The inability of European leaders to shore up Greece has allowed contagion to spread to spread to Italy and pushed the yield on its 10-year government bonds to a euro-era record of 6.4 percent on Aug. 5, spurring the European Central Bank to buy the debt of the euro area’s third-largest economy. The Frankfurt-based ECB said today it settled 14 billion euros ($19 billion) of bond purchases in the week through Sept. 9, up from 13.3 billion euros in the previous week.

In return for ECB action, Prime Minister Silvio Berlusconi was forced to deliver a 54 billion euro ($73 billion) austerity package that aimed to eliminate the budget deficit in 2013 and begin to reduce the region’s second-biggest debt. The yield on the country’s 10-year bond rose 10 basis points to 5.51 percent today.

Bond Auction

Demand for the country’s bills declined at the auction, one day before Italy sells four different bonds tomorrow to finance a 14.4 billion-euro maturity on Sept. 15. Investors demanded 1.53 times the 7.5 billion euros of one-year bills today, down from 1.94 times a month ago.

After the sale the yield difference between Italy’s benchmark 10-year bond and comparable German bunds widened 16 basis points to 379, approaching the record high close of 389 basis points on Aug. 4. The yield difference between Greek and German 10-year bonds rose to a record 21.4 percentage points. Credit-default swaps on Greece, Italy, Spain and France all advanced to records.

German officials are trying to brace their banks for a potential Greek default and debating how to shore them up in the event Greece misses budget-cutting goals and is unable to get a further loan payout, three coalition officials said Sept. 9.

“The contingency plans to shore up German banks in case of a Greek default are adding to negative sentiment,” said Philip Gisdakis, a strategist at UniCredit SpA in Munich.

No Exit

The European Commission isn’t working on scenarios for Greek default either,” spokesman Amadeu Altafaj told reporters in Brussels today. Papandreou called on Greeks to show skeptics that the country would not be forced from the single currency.

Angela Merkel’s government lurched into open conflict over tackling the debt crisis, as the German chancellor called for Greece to get more time and her coalition allies suggested it may need to default and leave the euro area.

“To stabilize the euro in the short term there can’t be any taboos,” Philipp Roesler, the vice chancellor and economy minister who heads Merkel’s Free Democratic coalition partner, said in an op-ed published in Die Welt newspaper today and e- mailed by his party.

The cost of insuring European sovereign and bank debt rose to records today. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments soared 17 basis points to 353 at 2 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 17 basis points to 317, according to JPMorgan Chase & Co.

Attacking ‘Vampires’

“The markets just won’t put up with this for much longer, so either this will push Greek to default, and the euro zone hasn’t done much from stopping that, or they will go like vampires and attack the next one,” said Ostwald.

French banks, among the biggest holders in Europe of Greek debt, came under pressure today with shares of Societe Generale falling to the lowest since 1995. Bank of France Governor Christian Noyer said French banks are capable of facing any Greek situation and don’t have liquidity or solvency problems.

Moody’s placed the three French banks’ ratings on review in June, citing “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels.” Cuts are likely as the review period concludes, said the people who declined to be identified because the matter is confidential.

--With assistance by Lorenzo Totaro in Rome Editors: John Fraher, Jeffrey Donovan

To contact the reporter on this story: Andrew Davis in Rome at

To contact the editor responsible for this story: John Fraher at

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