France and Spain Gingerly Return to Bond Market
France and Spain gingerly return to the bond markets Thursday, testing appetite for their debt after a raft of Eurozone credit downgrades, as world powers debated boosting the IMF bail-out fund.
The key test for two of the single currency bloc's biggest economies came as its weakest, Greece, was trying to negotiate a deal with private creditors to slash 100 billion euros ($128 billion) from its debt.
In Washington, the International Monetary Fund said it would seek up to $500 billion in new funds as the European debt crisis threatens the global economy, but the plan received a mixed response from world capitals.
Japan said Thursday that it was ready to help out, but the United States has resisted calls for a larger IMF stand-by fund, and its success will hinge on the attitude of emerging economies like China, Brazil and India.
Meanwhile, the debt crisis is undermining the euro itself. The Chinese ratings agency Dagong warned the world's problems would grow more severe in 2012 and could develop into what it called a "currency crisis".
"The credibility of the euro will fall, leading inevitably to a sell-off as foreign confidence in the single currency collapses," Dagong warned in its 2012 Global Sovereign Credit Risk Outlook.
In Europe, the mood was scarcely less pessimistic.
"In the Eurozone we are on the brink of a technical recession," said Jean-Claude Juncker, the Luxembourg prime minister who chairs the Eurozone, warning that GDP in the bloc has likely fallen over two quarters.
The World Bank slashed its global growth forecasts from 3.6 percent to 2.5 percent in 2012 on Tuesday, with the shaky recovery after the 2008 financial crisis now weakened by the tide of debt engulfing the Eurozone.
Against this backdrop, traders and policy-makers were nervously awaiting France and Spain's first long-term primary sovereign debt auction since Standard & Poor's downgraded their credit ratings last week.
France lost its top AAA rating and Spain dropped two notches from AA- to A.
This could theoretically expose them to higher interest rates on their long-term bonds, although markets had already largely factored in their woes in previous auctions and might decide to spare them further pain.
France was attempting to raise between 7.5 billion and 9.5 billion euros in bonds of between two and 10 years.
In its last long-term bond issue on January 5, before S&P's downgrade. France raised just shy of eight billion euros, but the rate on the benchmark 10-year bond rose to 3.29 percent, up from 3.18 percent on December 1.
Spain's borrowing costs have actually fallen on the secondary market since its downgrade, but Thursday's auction of between 3.5 and 4.5 billion euros of medium- and long-term debt will be a new test.
Greece, meanwhile, was locked in talks with private creditors, amid hopes that deal on a managed write-down of its unmanageable debt could save it from a default and give the rest of the eurozone a needed boost.
"Our estimation is that we might have an agreement before the end of the week," the a finance ministry official said Wednesday after a fresh round of talks got underway.
Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos are in talks with Charles Dallara, head of the Institute of International Finance (IIF) and lead negotiator for the banks.
The negotiations, aimed at cutting Greece's staggering total debt of more than 350 billion euros by just under a third, stumbled last Friday over the terms of new bonds that would replace some of the debt to be written off.
But they restarted on Wednesday and were due to continue in Athens on Thursday at around 1700 GMT. A team from the European Commission was due in Athens on Friday for further talks with Venizelos on his deficit-cutting plans.
