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business newsEurozone Watch: Coming Italian Debt Auction Will Offer 2012 Preview
By
Matthew Mallon
Dec 28, 2011 12:30 pm
As a truly brutal year for the eurozone stumbles to its close, a couple of post-Christmas events bear looking into.
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First, thanks to favorable market conditions caused in no small part by the European Central Bank’s recent flood of cheap cash, the Italian government held a successful bond auction on Wednesday, meeting its target of raising 9 billion euros through a well-subscribed sell-off of six-month bills, as well as picking up 1.7 billion euros from the sale of two-year paper.
Yields were significantly lower than similar auctions last month: The six-month bills sold at an average 3.251%, almost exactly half of last month’s 6.504% yield; two-year bonds yielded 4.853%, down from last month’s red-zone 7.814%.
The news helped sink key 10-year Italian bond yields back down below that dreaded 7% mark, and led The Wall Street Journal’s Alen Matich to declare the likelihood of any future Italian default “vanishingly small.”
But Matich and other observers are quick to note that the ECB’s three-year cheap cash spree is a temporary fix – and one that will have to be performed again; first when the ECB turns the liquidity cash flow back on again at the end of February, and again, a little further down the road, when those three-year cotton candy cash deals will most likely need to be rolled over for another term.
While Wednesday’s Italian auction results were a boost and cheered the markets for a while, a more important and much more tricky hurdle comes up on Thursday, when the government will be auctioning another 8.5 billion euros of debt off, this time in slightly less palatable three- and 10-year bond form.
Will the institutional investors – “the big foreign funds,” as Italian financial daily Il Sole-24 Ore calls them – come around? One hopes. The country has 161 billion euros of debt repayments scheduled between February and April of the coming new year. And if the foreign funds don’t come back for Italy tomorrow, where will they be during the rest of the first quarter of 2012, when the entire eurozone will mature 230 billion euros of bank bonds, 300 billion in government bonds, and over 200 billion in collateralized debt? Thursday’s auction may well set the tone for 2012.
The other key event over this relatively quiet holiday week: European banks broke ECB deposit records, putting 452.03 billion euros on deposit for 24 hours at the ECB overnight on Tuesday, beating the previous record of 411.8 billion euros, which had been set just the day before.
This worries analysts who think that record amounts being parked in a low-interest ECB vault -- rather than being used for potentially lucrative interbank lending deals -- indicates a profound level of distrust in the stability of the banking system from the banks themselves. So, no end to the liquidity problem despite the ECB’s cash-hose.
Others say, basically, forget it, Jake, it’s Christmas Town. There’s no way to figure out the precise meaning of all that loot in the ECB’s digital vaults at this time of year, a time of year when banks are traditionally eager to retain as much liquidity as possible, when half the world is still groggy from too much eggnog and festivity, and when, as Neil Mellor at BNY Mellon Global Markets Research told AFP, it is simply "too early to come to any conclusions" about the success of the ECB's long-term refinancing operation.
But keep an eye out for Thursday’s Italian auction. Even in the middle of the holiday doldrums, it will be a key predictor for those wondering just how ugly 2012 may get.
No positions in stocks mentioned.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
