As has become common during the nearly two years of Europe’s escalating debt crisis, reasons for guarded optimism that surfaced this week are being replaced with concern and doubt. In the wake of last week’s uplifting news that the European Central Bank (ECB) helped loosen a seriously tightening credit crunch by extending nearly $650 billion in super-cheap loans to the region’s over-extended banks, markets are now turning fearful again over the giant sovereign debt problem. On Thursday, investors demanded significantly high yields of 6.98% on new 10-year bonds issued by Italy. Though there’s good news in that rate being half a point lower than the record-high 7.56% Rome was forced to pay in November, it’s still a bummer in being untenably expensive over the long run, according to most experts. And that’s not the only downer in Europe.
The high yield required of those 10-year Italian bonds threw cold water on the careful optimism just a day before, on Wednesday, when Rome’s sale of $11.7 billion in six-month bonds went for rates of 3.25%–just half of the level investors demanded during a similar issue in November. Thursday’s investor response reversed what had looked to be significant softening of market positions during recent bond issues by Italy and Spain—both of which have seen their refinancing efforts spike dangerously high over the past quarter. The reason for the market rethink remains rooted—as always—in the deeper ground of Europe’s debt troubles. Despite new governments and reform programs that have been announced in both Italy and Spain, investor doubts remain high that austerity measures undertaken by Rome and Madrid won’t suffice to overcome the crisis—especially within growing signs that euro zone economies (and probably all of Europe) are sliding toward recession.
On Tuesday, France announced its jobless rate had increased to 9.3%–the highest level in 12 years—amid indications the country may have already entered recession. A similar jump in British unemployment lent credence to multiplying forecasts the UK is entering or has already begun a period of economic shrinkage. Little wonder, then, that with fears about slowing economic activity–and the decreased ability with which it will leave European governments to battle their debt ills—doubts about the euro and wider European Union’s existence have surged anew. On Thursday, the single currency slid to its lowest level in a decade against both the yen and dollar, and may close out 2011 under the $1.30 bar. At the beginning of 2011, it had been at $1.45.
Talk about great depression.
Yet according to some experts, there are reasons to take heart—at least as far as developments over the past week go. The ECB’s monumental lending program to banks may not be producing plummeting yield miracles for new European bond issues , but most observers do think the ECB’s bargain-basement loan effort has averted the nightmare scenario of credit and finance markets basically turning inward and caving in (and taking the European and global economies with them). Meanwhile, some commentators also note that the ECB’s loan scheme wasn’t intended to assist anyone but banks in the first place. Because of that, those analysts continue, the ECB is still holding its potentially game-changing trump card to relieve battered euro zone states themselves—that is, guaranteeing all member debts, and buying their bonds up in huge volumes—and can play it if and when Germany ever lifts its threat to veto the move as a last ditch effort to save the euro from explosion.
Meanwhile, though signs abound that much of Europe is headed for its second recession in less than half a decade—and indicate even nations that remain on the plus side will see growth of scarcely 1%–the falling level of the euro may actually help European export activity. Sure, a cheaper euro means European businesses, homes, and motorists will pay more for dollar-traded oil and gas; but the specter of the single currency that just months ago was worth nearly $1.40 falling even further from its current $1.29 level (to perhaps $1.25 to $1.20) offers hope of formerly pricey European goods suddenly looking cheaper to foreign consumers–especially those in the U.S. So while things are gloomy, some observers say, the situation isn’t necessarily doomsday.
So who’s right in the effort to read the bipolar swing of market sentiment and action on (or against) European debt? It’s probably not a great idea to bet the entire farm on the indefatigable optimists. Many market insiders point out that the holiday season—and especially the week between Dec. 25 and Jan. 1—is usually a time of reduced trading. What does go on during that period, they add, isn’t usually reflective of the longer-term, bigger-stakes activity that occurs most of the year. When investors get back to real business in 2012, we’ll probably see their wider outlook impact bond sales and yields—and it may not be too pretty.
The reason? Because 2012 will be the crunch year for the economically groggy euro zone, whose members will need to find an estimated $40.6 billion in new loans from markets as they roll over a collective total of $1 trillion in debt coming due. A huge chunk of the $330 billion Italy will need to refinance in 2012 will come due during the first quarter alone—a big reason why officials in Rome and economists elsewhere are hoping the recent easing of yields on Italian bonds will continue bringing rates down closer to tenable levels. But there isn’t much time left for that kind of positive evolution to unfold as dramatically as Italy and many other strapped states may need. Indeed, market reaction to Thursday’s issue raise doubts whether any real progress in that way will be made at all–and it’s impossible to know what will happen next week, much less next quarter. After all—and as always in the European debt crisis–we’re only one downturn away from another reason for hope cropping (momentarily) up.