France Auction Decent, But Concerns Remain Around Credit Rating

The European bond markets passed on test today as France managed to auction off debt today, soothing some concerns regarding access to funding by the sovereign.

From Bloomberg: The 17-nation currency slumped against most major peers after France sold 7.96 billion euros ($10.3 billion) of debt today in its first auction of the year as credit-rating companies threaten to cut the nation's top AAA ranking.

France sold 4.02 billion euros of benchmark 10-year bonds at an average yield of 3.29 percent from 3.18 percent in a sale on Dec. 1. The 10-year debt bid-to-cover ratio, or the number of bids received for each unit of debt sold, fell to 1.64 from 3.05. France also sold debt maturing in 2023, 2035 and 2041.

However key concerns remain about the country's credit rating and whether a downgrade may be coming down the pipe, following the failure of the recent EU Summit's to end the short term and longer term concerns for the sovereign debt and banking systems.

EFSF Auction to Provide Clues for Bailout Fund's Ability to Stem Crisis

The second key test for Europe comes tomorrow as the EFSF will try and auction off its bonds.

From BusinessWeek: Europe's bailout fund plans to raise 3 billion euros ($3.9 billion) from a sale of three-year bonds as soon as this week after Standard & Poor's said in December it may lose its top credit rating.

The EFSF plans to sell the bonds after S&P said Dec. 6 the fund may lose its AAA rating. The bailout fund, which is overseen by the euro-area members and sells debt to finance rescue loans extended to Europe's high-debt and deficit nations, owes its top credit grade to guarantees from Germany, France, Netherlands, Luxembourg, Austria and Finland.

The concern here is that if France and others lose their AAA credit rating the EFSF's ability to raise money will be curtailed, complicating the bailout fund's ability to stem contagion.

Hungary 1-Year Yields Just Below 10%

Hunary's yields continue to remain under pressure as the government failed to raise its expected amount add a bond auction today with 1-year yields reaching just below 10%.

From Financial Times: Analysts warned that the central bank might have to take drastic action to raise interest rates in an effort to prevent investors from selling assets after the sale of just Ft35bn in government debt, down from a targeted Ft45bn.

Investors have become increasingly concerned about the country's ability to pay its debt as bond yields have risen, with credit default swaps hitting a record high this week. A new law that curbs the central bank's independence as well as a lack of a clear timetable for negotiations with the IMF and the EU are also unnerving investors.

Here is a look at the 10-year yield in Hungary, showing the yields there moving above 10% to start the year.


Spain's Banks Needs to Raise €50 Billion for Further Restructuring

The Spanish government said that banks willing to set aside up to €50 billion in further provisions as new economy minister for the incoming government is trying to get banks to address their balance sheet issues. The figure is a bit more than expected by the banking sector and comes on top of the need of Spanish banks to raise capital buffers in order to meet new capital ratios. The amount is around 4% of GDP.

This announcement comes after Spain admitted that it would not be able to reach its budget deficit targets for 2011. the country overshot its targets by €22 billion mainly on the back of overspending by regional governments. The government therefore will impose further austerity measures in order to meet the shortfall.

From Financial Times: Economists say the target will be difficult to reach given that the 2011 deficit is now expected to reach 8.2 per cent of GDP, instead of the targeted 6 per cent, and that GDP itself is expected to shrink this year. Austerity measures, including the €6bn of tax rises and €8.9bn of public spending cuts announced last week, will further limit the prospects for growth.

Adding to worries in Spain as one of the regional governments was only able to repay €123 million it owed to George bank after the central government stepped in and helped.

The government in its first 100 days wants to impose aggressive economic reform agenda and we'll see what type of reaction that will elicit from market participants for Spanish debt.

EUR Slides Below 1.2850

Overall taking these concerns from the periphery (Spain), the core (France), and the far periphery (Hungary), it shows us that the pressure remains firmly on the euro as it fell below 1.2850 in today session, the first time it has done so since 2010.

For more on the EUR/USD see today's technical update: EUR/USD Slides Below 2011 Low; Opens 1.26

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.