Read news from:
Austria
SHARE
COPY LINK

ECONOMY

Tepid response to French bond auction

France successfully raised €7.96 billion ($10.23 billion) in new long-term bonds on Thursday despite lower demand, but was forced to pay higher interest amid fears over the country's credit rating.

Published: 5 January 2012 14:29 CET
Tepid response to French bond auction
Images of Money

In France’s first auction of 2012, the rate on the benchmark 10-year bond rose to 3.29 percent, up from 3.18 percent during the last long-term bond issue on December 1.

Demand for 10-year bonds was also lower, with a bid to cover ratio of 1.64, almost half of the 3.05 it was in the December auction. 

The drop in demand came despite the European Central Bank agreeing last month to loan a record 489.2 billion euros at 1.0 percent to 532 banks in a three-year refinancing operation.

Following the last similar operation during the global financial crisis, banks used a considerable portion of the money to buy sovereign bonds, helping keep government borrowing rates low.

“The French bond auction this morning saw decent demand but rising yields showed a deterioration in investor confidence in France’s ability to maintain its top notch credit rating,” said City Index analyst Joshua Raymond.

Ratings agencies have warned that France is exposed to the sovereign debt crisis gripping the eurozone and have threatened to downgrade its hitherto perfect rating.

Thursday’s auction did however reach the treasury’s goal of raising between €7.0 and €8.0 billion.

For the 10-year bonds, maturing on October 25, 2021, the amount raised was €4.02 billion.

For bonds maturing on October 25, 2023, €690 million were raised at an average rate of 3.50 percent.

Longer term, France raised €1.09 billion at an average rate of 3.96 percent on bonds maturing on April 25, 2035.

And on bonds maturing on April 25, 2041, France raised €2.17 billion at an average rate of 3.97 percent, against 3.94 percent during the last similar operation.

France said in late December it will need to raise €178 billion in medium and long-term bonds in 2012, slightly less than last year, as the state will have to meet a budget deficit of €78.7 billion and repay €97.9 billion in debt.

“This auction was on the whole a success,” said Cyril Regnat, an analyst with Natixis.

“Demand remains sustained and on the very long-term the allocated amounts already cover a large part of what was raised in all of 2011,” he said.

The government is struggling to convince financial markets and ratings agencies that it should keep its top credit rating and has imposed two deficit-cutting packages aimed at saving a total of €72 billion since August. 

It has said it needs to save €100 billion to balance its budget by 2016 but President Nicolas Sarkozy, facing a tough re-election battle in April, has vowed no new austerity measures.

Analysts said the markets seemed unimpressed by the auction and the euro plunged to a new 16-month dollar low.

“The euro was already under pressure before the results of the French auction came out, having fallen to 16-month lows of $1.2848,” said Spread Co analyst Ian O’Sullivan.

“It stabilised a little before the auction, recovering to $1.2880 but it was shortlived as the market seemed underwhelmed by the auction and just went about selling the euro again until another new 16-month low of 1.2831.”

Investors were also waiting on Thursday for the European Financial Stability Facility, the eurozone bailout fund, to issue its first bonds of the year.

The EFSF has said it will issue €3.0 billion in three-year bonds to help financially struggling Ireland and Portugal.

For members

ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

SHOW COMMENTS