Posted by WARREN MOSLER on October 29th, 2008
Not looking at all promising.
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 ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬180,000 to insure ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬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 ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬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 ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬925bn ($1,200bn) in 2009, according to Barclays Capital. The UK, which is expected to increase its bond issuance from the current ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬137.5bn in the 2008-09 financial year, will take the figure above ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬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 ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬220bn in 2009.