Eurozone confidence improves

By Sarah Dilorenzo

Associated Press

Published: Thursday, Jan. 19 2012 9:39 p.m. MST

France's President Nicolas Sarkozy, right, listening to a worker as he visits a factory of the Groupe SEB, a leading worldwide manufacturer of small domestic appliances and cookware in Pont-Eveque, central France, Thursday, Jan. 19, 2012. (AP Photo/Michel Euler, Pool)

Associated Press

PARIS — France and Spain sailed through their first long-term debt auctions since their credit ratings were downgraded by Standard & Poor's, a sign that politicians and the central bank have at least temporarily stemmed the spread of Europe's debt crisis.

S&P's decision last week to downgrade nine countries that use the euro because of concerns over Europe's ability to get a grip on the crisis was largely anticipated by investors and so had little market impact. In fact, the euro, stocks and bonds have mostly risen in recent days.

Both Spain and France held successful short-term debt auctions earlier in the week. Spain's success is at least partially thanks to the European Central Bank's massive injection of cheap money into the market in December and its regular purchases of Spanish and Italian debt.

But the latest auctions on Thursday were for longer-term bonds and were considered the first real tests of confidence in those countries.

Both easily hit their targets thanks to strong demand, while the borrowing rates fell, an indication investors are still happy to invest in them.

The results boosted confidence in eurozone banks, particularly those that are heavily exposed to bonds in countries like Greece and Italy.

Shares in Italy's UniCredit soared 13 percent, France's Societe Generale 12 percent, and Deutsche Bank 9 percent. Germany's Commerzbank jumped 12 percent after it said it would be able to increase its capital cushions without government help.

A restart to debt negotiations in Greece, which is trying to persuade the private holders of its bonds to take at least 50 percent losses, also helped confidence. The talks had faltered recently but will need to produce a deal if Greece is to avoid default this spring — the European countries ponying up the money for bailout loans have said they won't make up the difference.

Greece is in a unique situation because it's clear it can never pay back all the money it owes, and so is asking banks to forgive some of its debt.

A rise in government borrowing rates has been at the heart of Europe's debt crisis, and three countries — Greece, Ireland and Portugal — have been forced to seek bailout loans to avoid bankruptcy when they could no longer afford to raise money in markets.

There had been concerns last summer that Spain and Italy would be the next to be squeezed out of markets and that the crisis would then knock at France's door. Pressure has eased considerably since then, but Spain is still struggling with a swollen deficit and eurozone-high 21.5 percent unemployment rate.

The yield on Spain's 10-year bonds hit nearly 7 percent late last year, while Italy's traded well above that level, before an ECB bond-buying program helped to drive them down.

Changes of government in both Madrid and Rome have also helped restore confidence in the countries' ability to pass reforms and reactivate their ailing economies.

On Thursday, Spain's Treasury raised (euro) 6.6 billion ($8.5 billion) from markets, much more than its initial aim of between (euro) 3.5 billion and (euro) 4.5 billion, in debt maturing in 2016, 2019 and 2022.

The interest rate on the 10-year bonds was 5.40 percent, down from 5.54 percent in the last such auction in December, while demand was 2.2 times the amount on offer.

France's situation is far less serious than Spain's but as the eurozone's second-largest economy any hint that it is struggling to fund itself would send shockwaves through markets. Last year, the benchmark yield on its 10-year bonds rose to near 4 percent, almost twice Germany's.

But the new year has brought that rate down closer to 3 percent and on Thursday, France easily sold (euro) 9.5 billion ($12.2 billion) in bonds.

The interest rates on the two-year, three-year, four-year and 10-year inflation-linked bonds the Treasury sold all fell significantly. The rate on 30-year inflation-linked bonds held steady.

The largest issue Thursday was (euro) 3.43 billion ($4.4 billion) worth of 4-year bonds. The average interest rate was 1.89 percent, down from 2.32 percent the last time they were sold in November.

Though S&P's downgrade hasn't had a big impact in the markets, the loss of the AAA rating was a severe blow to France's self-image and is shaping up to be a major factor in presidential elections this spring.

President Nicolas Sarkozy's government has brushed it off as only a minor setback and noted that the other two major agencies have maintained France's AAA.

"In these circumstances, the only solution is calm, distance, courage, the courage to make decisions," Sarkozy told business leaders Thursday. "It's not the agencies that make state policy."

But the opposition Socialists, whose candidate Francois Hollande is leading polls, have been using it as a rallying cry, saying it reflects the failure of Sarkozy's policies.

Sylvie Corbet in Lyon, Daniel Woolls in Madrid and Derek Gatapoulos in Athens contributed to this report.

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