Today in the euro zone

March 15, 2012

Morning all from a fogbound London. Visibility may be down to a minimum but there is a developing view that the euro zone debt crisis, if not solved, is in remission.

Spain should follow Italy’s lead yesterday and sell short- to medium-term bonds with ease despite a tussle with the EU over what deficit level it should be aiming for next year. Madrid will sell up to 3.5 billion euros of three- and four-year paper, a lower amount than it has been pushing out so far this year, which means it should be snapped up.

There has been some disquiet in the market after Prime Minister Mariano Rajoy threw out a Brussels-agreed target of a 4.4 percent/GDP deficit this year and said he would only shoot for 5.8. His peers have subsequently hauled him back to 5.3. But any doubts over debt slippage continue to be overwhelmed by the wall of money created by the ECB which is sloshing around the financial system looking for a home.

If Spain sells at the top end of its target range today, it will have shifted nearly 45 percent of its annual issuance in less than a third of the year. Italy is also making great strides (it shifted six billion euros of debt yesterday at markedly lower yield) – a factor that is taking further stress out of the euro zone debt crisis, at least in the short-term.

Rewind to the beginning of the year and everybody was fretting about Italy facing a mountain of refinancing (with the same true of Spain to a lesser extent) and now it looks like no more than a small bump in the road thanks to the ECB’s largesse.

Markets remain (dread phrase) “risk on” mode. German Bund futures have shed another half point although European stocks look flatter after a good run so far this week. France also comes to the market with a bond sale today and should benefit from the same prevailing market conditions.

After the Greek parliament formally approved the terms attached to a second bailout on Wednesday, Portugal has been firmly identified as the next shoe to drop although the EU’s economy chief, Olli Rehn, said late yesterday that Lisbon was on track with its bailout programme. While Italian and Spanish borrowing costs have tumbled, largely thanks to the ECB, Portugal has failed to hitch on to that ride. However, a second package for Lisbon would probably need to be in the region of 30 billion euros, not a sum to stretch the euro zone’s resources.

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