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Not looking at all promising.

Austria abandons bond offering

By David Oakley

Austria, one of Europe’s stronger economies, cancelled a bond auction yesterday in the latest sign that European governments are facing increasing problems raising debt in the deepening credit crisis.

The difficulties of Austria, which has a triple A credit rating, highlights the extent of the deterioration, which saw benchmark indicators of credit risk such as the iTraxx index hit fresh record wides yesterday.

Austria is the fourth European country to cancel a bond offering in recent weeks amid growing worries over its exposure to beleaguered eastern European economies such as Hungary.

Hungary, which has been forced to turn to the International Monetary Fund to shore up its crisis-hit economy, also scrapped an auction for short-term government bills after only attracting Ft5bn ($22.5m) in a Ft40bn offering.

Analysts said Austria had dropped plans to launch a bond next week because investors wanted bigger premiums to offset the credit worries and fears over lending by its banks to eastern Europe.

The Austrian Federal Financing Agency did not give a reason for the move.

Spain, another triple A rated country, and Belgium have cancelled bond offerings in the past month because of the turbulence, with investors demanding much higher interest rates than debt managers had bargained for.

Market conditions have steadily deteriorated in recent days with the best gauge to credit sentiment, the iTraxx investment grade index, which measures the cost to protect bonds against default in Europe, widening to more than 180 basis points, or a cost of €180,000 to insure €10m of debt over five years, yesterday.

This is a steep increase since Monday of last week, when the index closed at 142bp.

Huw Worthington, European strategist at Barclays Capital, said: “These are difficult markets. Austria did not need to raise the money, so it has decided to hold off but, if these conditions persist, it could prove a problem for some governments as their debt needs to be refinanced.”

Analysts warn that the huge pipeline of government bonds due to be issued in the fourth quarter and next year could increase problems for some countries, particularly those already carrying large amounts of debt that needs to be refinanced or rolled over.

European government bond issuance will rise to record levels of more than €1,000bn in 2009 – 30 per cent higher than 2008 – as governments seek to stimulate their economies and pay for bank recapitalisations.

The eurozone countries will raise €925bn ($1,200bn) in 2009, according to Barclays Capital. The UK, which is expected to increase its bond issuance from the current €137.5bn in the 2008-09 financial year, will take the figure above €1,000bn.

Italy, with a debt-to-gross domestic product ratio of 104 per cent, is most exposed to continuing difficulties in the credit markets. Analysts forecast that it will need to raise €220bn in 2009.


8 Responses

  1. Seems that other countries are handling the credit crisis better than ours. They seem to know you don’t solve what is basically an overhang of debt by issuing even more debt. Hopefully the brain trust in Washington will soon discover this to. The problem is there is to much debt in the U.S.A. That problem is not solved by going deeper in debt. Truly pathetic! At some point the dollar will tank, and than what?

  2. Warren,

    On the Fed’s most recent, Statement of Condition, it lists under “Other Assets” $522.9 billion. In the footnote next to this entry it describes “other assets” as, “Includes assets denominated in foreign currencies and any exchange-translation assets, which are revalued daily at market exchange rates.”

    I suspect this is the amount lent out so far, because this figure is $481 billion higher than it was one year ago.

  3. Any bets on when people in Euroland will put 2 and 2 together and realize that governments that can’t float bond issues can’t insure their banks? This run is gonna make the early 30’s look like a tea party…

    Ted –

    You need to read Warren’s “Mandatory Readings”.

  4. 1. yes, it begs a fiscal response, and haven’t seen much of that anywhere lately. all they are doing is rearranging the financial assets. only fiscal policy adds net financial assets, not monetary policy.

    2. makes sense. what was the date of the entry?

    3. yes, exactly, and when it happens it will be quick

  5. Warren,

    If a goverment issues money and they can always sell the bonds in their currency since that is providing an interest earning alternative to the non-interest earning pile of cash with people, then why these countries having diificulty selling enough bonds?

    If I have Haungary’s ft10bn which is not earning any interest and Hungary offers bonds, why would not I buy it? It pays me interest. If goverment cannot pay interest on its debt, I loose it. But ebven if I don’t buy bonds, I loose it because of the devaluation.


  6. the national govts in the eurozone are in the same position as the US states. unlike the federal govt, they need to borrow first in order to spend.

    as trichet has mentioned more than once, the eurozone needs a fiscal authority much like the US treasury or the tsy of any other nation.

    regarding hungary, i don’t have the details as to what they’ve been up to, but can infer the following from the headlines:

    yes, as you state, hungary could spend first and then not care if the bonds were bought or not, and set their own interest rate, if they were ok letting the currency float,

    but instead they were trying to support the currency to help local borrowers who owed euros and yen they had borrowed to buy their homes.

    In otherwords, they were trying to fix the value of their currency by buying it on the open market with euros they soon didn’t have.

    if they spend currency that people want to exchange back to the govt for the reserves (euros), they will run out. so they need to sell secs in order to keep people from doing that.

    in trying to sell debt, they are competing with the option to convert they are offering. so (as with fixed fx) selling secs drives rates
    up to where people would rather hold the bonds than convert. this can go parabolic to the point there is no rate that will stop conversion.

    this is what happend to russia in 1998 as rates soared to over 200% and didn’t stop conversion. see ‘exchange rate policy and full employment’ at http://www.mosler.org for details on how this all works operationally.

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