Bloomberg News

France Joins Spain to Defy Moody’s With EU14.2 Billion Debt-Sale

February 17, 2012

Feb. 16 (Bloomberg) -- France and Spain sold 14.2 billion euros ($18.5 billion) in bonds, defying a ratings cut for some European nations by Moody’s Investors Service and concern about a second bailout for Greece.

Both countries had more demand for their debt than they offered. France sold 8.45 billion in two- three- and five-year bonds and 1.71 billion euros of index-linked debt. Spain issued 4.07 billion euros in securities maturing in 2015 and October 2019. The yield on France’s benchmark two-year notes fell, while Spanish borrowing costs rose.

The European Central Bank’s three-year lending program for banks, dubbed LTRO, helped demand for the auctions, which come three days after Moody’s cut the ratings of six European nations including Spain and revised its credit outlook on France to “negative.” European finance ministers postponed until at least Feb. 20 a decision slated for yesterday on Greek aid totaling 130 billion euros.

“Real-money investors are buying risk,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.

Yields on French benchmark 10-year bonds were unchanged at 2.99 percent. They have fallen about 14 basis points since the start of this year even after Standard & Poor’s cut France’s AAA rating by one level on Jan. 13. Spain’s 10-year bond yield rose two basis points after the auction to 5.548 percent. The yield difference over German bunds of the same maturity widened further after the auction to 364 basis points.

‘High’ Demand

France sold 2.09 billion euros in notes maturing in July 2014. Demand was 2.3 times the amount sold, with the yield falling to 0.89 percent from 1.05 percent at the previous auction. France also sold 1.34 billion euros in notes maturing in 2015 and 5.03 billion euros in notes maturing in 2017.

Spain sold 2.27 billion euros of benchmark bonds maturing in July 2015 to yield 3.332 percent, up from 2.861 percent when the security was last auctioned on Feb. 2. Demand for the bond was 2.19 times the amount sold, the Treasury said, compared with 1.63 times on Feb. 2.

Spain also sold a bond maturing in January 2015 to yield 2.966 percent and a 2019 bond was priced to yield 4.832 percent, the Bank of Spain said. Demand for the January 2015 bond was 4.37 times the amount sold and was 3.27 times for the 2019 bond.

Spanish Economy Minister Luis de Guindos said today that the “high” demand at the Spanish bond auction reflected investors’ confidence in the economy.

ECB Loans

“Despite the difficult environment, the Spanish Treasury managed to sell the maximum amount of bonds with high demand, which is an important sign of confidence in the Spanish economy and the measures being adopted,” he told Parliament in Madrid.

In a bid to address the region’s banks’ funding woes, the Frankfurt-based ECB loaned euro-region banks a record 489 billion euros for three years on Dec. 21, adding to the market’s liquidity. The central bank is slated to make another such offer to banks on Feb. 28.

“The market is still seeing support ahead of the next three-year LTRO,” said Harvinder Sian, an interest-rate strategist at Royal Bank of Scotland Group Plc in London.

France has trimmed its 2012 debt sales plan as President Nicolas Sarkozy, who faces an election in less than three months, seeks to cut the country’s budget deficit. France will require 177.9 billion euros in financing this year, down from the 182 billion euros estimated on Sept. 28, Agence France Tresor, the country’s debt-management body, said in December.

‘Progressive Deterioration’

The LTRO-led demand for the nation’s bonds explains why yields haven’t risen even as the country missed last year’s budget deficit target, Sian said. Prime Minister Mariano Rajoy has to cut the nation’s shortfall by about 45 percent this year while fighting a second recession in two years.

Still, the ECB can’t sustain demand for European bond issues indefinitely, some analysts noted.

“The reaction of markets at this stage has been an artificial one, because we had liquidity effects helped by a number of decisions, notably by the ECB that can’t be eternally repeated,” Philippe Dessertine, a professor of finance at the University of Paris West Nanterre, said on TF1 television.

There’s a risk we’ll see a “progressive deterioration of demand for French public debt that will be felt bit by bit,” he said on the Paris-based TV channel on Feb. 14.

Separately, Luxembourg Prime Minister Jean-Claude Juncker yesterday said Europe is set to make “all the necessary decisions” at a summit in Brussels on Feb. 20 intended to pave the way for the endorsement of a 130 billion-euro aid package to Greece. The decision, initially expected last week, was postponed as European leaders struggled to extract concessions from Athens.

--Editor: Vidya Root, Andrew Davis

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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