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Europe's
parade of surreal financial news just keeps coming. This week, investors are
paying Germany to take their money by accepting negative interest rates on
new government debt:
Germany Issues Bills With Negative Yields As
Economists Agree Country Is In Recession
Continuing
the schizoid overnight theme, we look at Germany which just sold €3.9
billion in 6 month zero-coupon Bubills at a record
low yield of -0.0122% (negative) compared to 0.001% previously. The bid to
cover was 1.8 compared to 3.8 before.
As per the
FT: "German short-term debt has traded at negative yields in the
secondary market for some weeks with three-month, six-month and one-year debt
all below zero. Bills for six-month debt hit a low of minus 0.3 per cent
shortly after Christmas...The German auction marks the start of another busy
week of debt sales across Europe. France and Slovakia are also selling bills
on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany
will auction five-year bonds on Wednesday, while Thursday sees sales of
Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds
on Friday."
Still the
fact that the ECB deposit facility, already at a new record as pointed out
previously, is not enough for banks to parks cash is grounds for alarm bells
going off: the solvency crisis in Europe is not getting any easier, confirmed
by the implosion of UniCredit which is down now
another 11% this morning and down nearly 50% since the atrocious rights
offering announced last week. On this background Germany continues to be a
beacon of stability, yet even here the consensus is that recession has
arrived. As Bild writes, according to a bank
economist survey, Germany's economy is expected to shrink in Q1, with wage
increases remaining below 3%. And as deflation grips the nation, potentially
unleashing the possibility for direct ECB monetization, look for core yields
to continue sliding lower, at least on the LTRO-covered short end.
And big
European banks are borrowing from their corporate customers rather than
lending to them:
Banks Turn Borrowers, Seek Cash from Customers
European
banks have found a new way to bring in cash. They borrow it -- but instead of
turning to each other to bring in funds, they are borrowing it from companies
that were once happy to deposit their excess cash in exchange for interest.
Worries over the eurozone crisis have hit both the
banks and their former depositors, and now both have worked out a new
arrangement that seems to satisfy them both -- at least for now.
Reuters
reported Monday that banks, wary of borrowing from one another or a central
bank over debt fears, have begun negotiating secured lending arrangements
with companies flush with extra cash -- which, instead of receiving a regular
unsecured interest payment in exchange for their money, now insist on
collateral and other measures in so-called repo deals or short-term secured
lending.
While
companies themselves are reluctant to talk about such measures, one source
said that in one specific category of lending, companies account for 25% of
these deals. Very large companies with an abundance of cash are typically the
ones that will execute such arrangements. Johnson & Johnson, Pfizer and
Peugeot are reported to be among them, as some of the most recent entrants
into the repo field.
These two
events are clear signs of a stressed system. But they're not an immediate
threat to anyone's portfolio. That will come when the peripheral Euro-zone
countries start refinancing their sovereign debt. On Thursday and Friday, for
instance, Spain and Italy have to convince the markets to lend them a total
of almost 20 billion euros:
Spain tests demand for weaker euro zone states'
bonds
MADRID, Jan
12 (Reuters) - Spain will provide 2012's first real test of demand for debt
from the euro zone's bruised periphery on Thursday when it sells around 5
billion euros ($6.39 billion) of bonds.
Italy will
also venture into markets with a short-term debt sale before embarking on
this year's massive campaign of bond issuance at an auction on Friday.
The two
countries are among weaker euro zone states scrambling to convince markets
they can slash their deficits while somehow also stimulating growth and
creating jobs and are seen as especially vulnerable should the debt crisis
escalate.
Spain's
Treasury will auction a new three-year benchmark bond and reopen two bonds
each maturing in 2016, in a sale that is expected to attract substantial
support from domestic banks flush with European Central Bank cash.
"The
massive size of the three-year lending from the ECB reinforces the view that
auctions should be supported by domestic investors," said BNP Paribas
strategist Ioannis Sokos.
A Treasury
bill sale will meanwhile give Italy a first taste of investors
sentiment before it auctions up to 4.75 billion euros of bonds on Friday.
Rome is
scheduled to sell 8.5 billion euros in 12-month BOT bills and 3.5 billion
euros of bills maturing at the end of May.
Italy must
refinance more than 90 billion euros of longer-term bonds falling due between
February and April, and with no end in sight to the European debt crisis, its
bonds remain under intense pressure, with yields at levels viewed as
unsustainable.
The European
Central Bank has pumped so much liquidity into the system that this week's
debt sales will probably succeed without rattling the markets too much. But
that 90 billion euros Italy has to roll over between February and April will
make every day a new adventure.
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