Welcome to 2012 - The Euro crisis is back

After a seasonal lull the Eurozone returns with a vengeance - French bond yields are up, Italian bank Unicredit's shares are tumbling and Hungary faces a currency crisis.

by Andrew Saunders
Last Updated: 06 Nov 2012
Today’s French bond auction has been eagerly awaited and went about as well (or badly) as could be expected. France sold 8bn Euros of debt and the yield on 10 yr bonds was 3.29% - 9 basis points higher than at its last auction in December. Tellingly, demand was also down significantly.

3.29% may be a long way off the danger zone of 7% which we have heard so much of apropos Spain, Greece and Italy recently, but the rise in yields triggered a dramatic fall in the value of the Euro all the same, down to a 16 month low against the dollar of  $1.2831. Will the 65bn Euro French austerity plan announced last month be enough to stave off the loss of the country’s treasured AAA credit rating? Probably not, although since the markets have factored this in for months now any downgrade, if it does happen, will be a blow to Gallic pride as much as to the economy.

And so to Italy, where shares in the country’s largest banking group, Unicredit, have been on the slide again. The stocks were down 14% yesterday, making a total fall of almost 70% in the last year. Ouch.  The cause of this latest slump?  The group announced the price of its new rights issue, which at 1.94 Euros is 43% below ‘market’ value - a substantially greater discount than expected. Even so, it appears that only 24% of its shareholders have taken up the offer, hardly a ringing endorsement.

Unicredit has to raise an estimated 8bn euros by June to comply with tough new European capital requirements. So this rights issue is important not only for Unicredit but also for other European banks, as it will test the appetite of investors for similar offerings from other institutions this year.

Meanwhile in Eastern Europe a whole other (albeit rather less internationally significant) currency crisis is brewing as the Hungarian forint hit an all-time low against the Euro of 321.67 yesterday. Hungarian debt has already been downgraded to junk status by the two largest ratings agencies and as of today its bond yields are running at a frankly bonkers rate of nearly 10%, so some kind of drastic action is expected.

A bail out looks increasingly likely, provided the Hungarian authorities can stop falling out with their potential saviours: the government in Budapest is embroiled in a row with the ECB and IMF over what look like plans to rob its central bank of independence in order to plunder foreign currency reserves to pay off maturing debt. Hardly a textbook approach. The alternative is a sudden and very large hike in interest rates to try and stem the flood of investors selling off forints, a grim prospect for Hungarian consumers.

And while Hungary may not be in the Euro, it is in the EU so its troubles are by no means isolated from the rest of the Union. That’s the thing with these pesky economic crises, they simply will not remain tidily in their own boxes but rather spill out messily all over the place. And there’s plenty more of this mess still to come…

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