Hedge Funds Stripping Assets from Europe

Sept. 13, 2011 - PRLog -- Managers on the US money market, headed by Vanguard Group Inc and Legg Mason Group Inc, are cutting loans to French banks so fervently, that it may force these banks to increase their capital by selling stocks, said William Prophet, an analyst with Deutsche Bank Securities Inc. Meanwhile, Italian officials, led by Prime Minister Silvio Berlusconi, conducted negotiations with their Chinese colleagues about potential investments in the EU’s third-largest economy. Signs of the “Greek contagion” are threatening to infect Italy and have pushed yields on the country’s bonds to a record high since the Euro zone’s creation. Berlusconi’s government swiftly passed a 54 billion Euro austerity package through parliament to convince the European Central Bank to buy its debt. But DT Trading analysts note that over 60 billion Euros spent on buying up European bonds the past five weeks have not convinced investors to buy Italian bonds.

American funds are reducing their shares in European banks amid fears that financial institutes may run into problems with financing after the sovereign debt crisis escalates. Moody’s Investors Service may lower the ratings for BNP Paribas (BNP) SA, Societe Generale SA and Credit Agricole SA (ACA) this week because of a Greek debt package that these banks hold in their funds.

Funds financed by BNP Paribas, Societe Generale (GLE) and Credit Agricole are taking an average of 6.7 basis points more from them on three-month loans as of September 8 than the rate which creditors could pay for analogous financing at the LIBOR market rate in London. In July, these banks could have received financing on commercial paper or short-term promissory notes which would have been lower than the LIBOR rates in London.

Nevertheless, Italy will hold its auction for 7 billion Euro ($10 billion) for selling its own bonds. This comes the day after interest rates on loans increased as the threat of Greece slipping into default spins the flywheel on world markets.
The Italian treasury will sell 4 billion Euros’ worth of its new five-year bonds after yields on 10-year bonds rose to a five-week high of 5.571%. During yesterday’s auction, investors were asking 4.153% from Italy on one-year promissory notes, compared with 2.959% a month earlier. “It’s rather unfortunate that the Italian auction is taking place when the market is in panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.”
The 1.9 trillion Euro debt – more than Spain, Greece, Ireland, and Portugal combined – leaves Italy extremely vulnerable to any advances in borrowing costs while it goes deeper into the pit to refinance its old debts. Sales, which also include at least 3 billion Euros with a turnover time before 2018 and 2020, will help gather 14.5 billion Euros for payments on old debts scheduled for September 15.
Today we await the publication of data on the second part of the inflationary report in the UK. As the Bank of England recently announced in the last published minutes from its July meeting, inflation may reach 5.0% by the end of the year. In light of this assessment, DT Trading economists are expecting the Consumer Price Index to grow by 4.6% in August in annual terms, compared with 4.5% growth according to the July report.

DT Trading Limited Analytical Department

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