Bond Yields Up, GDP Growth Down
We’ve grown accustomed to having the yields on Italian and Spanish sovereign debt rise (and their prices fall). But now, the sell-off is spreading to triple-A-rated eurozone sovereigns. Today, French, Dutch, and Austrian bonds fell.
From the European edition of the Wall Street Journal (no link):
The yield on the benchmark 10-year French bond climbed 0.09 percentage point to 3.52%, the highest level since May, according to Tradeweb data. The 10-year French/German yield spread widened 0.21 percentage point to 1.84 percentage points.
Yield spreads on 10-year Belgian and Austrian bonds against Germany also widened to euro era highs of 3.03 percentage points and 1.81 percentage points, respectively. The 10-year Dutch/German yield spread widened 0.09 percentage point to 0.63 percentage point.
“The focus on France has been high in the last couple of weeks but the aggressive widening in Dutch and Finnish paper could mean that the crisis is about to escalate to a new, more dangerous level,” interest rate strategists at Royal Bank of Scotland said in a note.
Elsewhere, the Journal reports:
Over in the market for credit default swaps, the cost of insuring Italian, Spanish, French and Belgian debt against default shot to fresh record highs while Italian CDS hit the 600 basis points level for the first time. But worrying as all this is, it’s nothing to the signs that even triple-A rated countries such as the Netherlands, Finland and Austria are not immune from contagion.
[The following paragraph brings to mind the 1931 failure of Austria's Creditanstalt bank, which sparked the second downleg of the Great Depression.]
Concerns about Austria can perhaps be explained by that country’s historic ties to Hungary, where the average yield on a sale of three-month Treasury bills jumped above 6.7%. Fears that Hungary’s debt could lose its investment-grade status have hit the country’s currency, the forint, and sent the cost of insuring its debt ever closer to its record high. Perhaps in response, Austrian yield spreads over Germany hit new euro-era highs Tuesday, while Austrian CDS hit 229 basis points, well above the 181 bps reached in September and closing in on the record 269 bps hit in March 2009.
Turning to the real economy, the Journal reports that
Surveys from purchasing managers suggest the manufacturing sector contracted throughout the region in October. Germany’s ZEW index, which measures confidence among financial analysts, fell in November to its lowest level since October 2008.
“The message is pretty clear: The euro zone is entering recession, the economy is starting to contract and it is contracting across the region,” said Greg Fuzesi, economist at JPMorgan Chase in London. Mr. Fuzesi thinks euro-zone output will decline in the fourth quarter and during the first three quarters of 2012, slicing 1% off the region’s GDP before the downturn ends.
Among the drag factors that could tip euro zone into recession: The region’s banks face further write-downs on their Greek bond holdings, with unknown spillover effects on other euro nations’ bond markets. The falling values of Italian government bonds have yet to work their way through the banking system and economy, analysts say.
The economic outlook is increasingly uncertain in France, which has said it will raise taxes and cut spending next year to bring its deficit down.
On the same subject, the Financial Times reports that
Eurozone gross domestic product expanded by 0.2 per cent compared with the previous three months – the same pace as in the second quarter, according to Eurostat, the European Union’s statistical unit. But economists warned that the effects of the escalating eurozone debt crisis, and sweeping fiscal austerity measures across the continent, had yet to feed through and growth would soon go into reverse.
Highlighting how the crisis had already spread to better-performing northern European economies, the Netherlands reported a surprise 0.3 per cent third quarter contraction, with local economists blaming falling wages and economic uncertainty, and thus may have already fallen into recession.
Earlier this month, Mario Draghi, the new European Central Bank president, forecast a “mild recession” by the end of the year. Even though the eurozone debt crisis still does not appear as big an economic “shock” as the collapse of Lehman Brothers investment bank in late 2008, forward-looking indicators and confidence surveys suggest Mr Draghi’s comments might prove over-optimistic. Eurozone purchasing managers’ indices fell sharply in October and indicated the region’s economy was contracting at a quarterly rate of about 0.5 per cent.
Italy has yet to report third quarter GDP data, but may also have fallen into recession already – and is widely expected to see a sharp contraction in the final three months of the year.
In coming months, the effects of the escalation of the eurozone debt crisis since August are expected to act as a significant brake on growth, with weakened banks curbing loans to businesses and consumers, while plunging economic confidence leads to spending and investment plans being shelved.
Eurozone growth would also be hit by fiscal consolidation measures equivalent to 1.4 per cent of GDP this year, and 1.3 per cent GDP in 2012, said Nick Kounis at ABN Amro in Amsterdam. “As the debt crisis has intensified, Europe’s response is always ‘we need more cuts’. There is not really a growth agenda, there is an austerity agenda.”
Some good news:
Cocaine use in Europe is falling and may have peaked, partly because of the impact of austerity measures and challenges to the drug’s image as part of an affluent lifestyle, the European Union’s drug agency said on Tuesday.