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While you were sleeping: Merkel says no euro bond

Friday 25th November 2011

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German Chancellor Angela Merkel dug in deeper against the calls for common debt issuance and a larger role for the European Central Bank to help stem the crisis in the increasingly troubled euro zone.

On Thursday, Germany and France agreed to push for changes to European Union treaties to achieve closer fiscal union.

Meanwhile, the ECB is looking at extending the term of loans it offers banks to two or even three years to try to prevent the debt crisis precipitating a credit crunch that chokes the bloc's economy, Reuters reported, citing people familiar with the matter.

To date, the longest term it has offered funds is one year.

Investors are demanding an increasing premium to hold bonds in the euro zone, which is aggravating the plight of nations already struggling with ballooning budget deficits.

"The market has hoped for a bigger role of the ECB in resolving the crisis as a near-term solution, and common bonds as a longer-term fix, but somehow those two ideas were rejected today,” Achilleas Georgolopoulos, a fixed-income strategist at Lloyds TSB Bank in London, told Bloomberg News.

Italian bonds dropped, boosting 10-year yields as much as 16 basis points higher to 7.12 percent. Belgian bonds declined for a fourth day, sending 10-year rates 26 basis points higher to 5.74 percent, the highest since September 2000, according to Bloomberg News.

Portugal's bonds also fell, sending the yield on 10-year bonds up 90 basis points to 12.21 percent, as Fitch Ratings cut the nation’s credit rating to below investment grade, citing its ballooning debt and slumping economy.

Fitch said a deepening recession made it "much more challenging" for Portugal to slash the budget deficit, though it still expected fiscal goals to be met both this year and next.

"However, the risk of slippage - either from worse macroeconomic outturns or insufficient expenditure controls - is large," Fitch said.

And Germany keeps suffering, too. The yield on Germany's 10-year bund climbed four basis points to 2.19 percent, a day after the nation failed to find buyers for nearly half a bond sale of 6 billion euros.

The lack of appetite for German debt only served to fuel the fire of concern about the region's ability to combat the crisis.

It will be years before the euro zone's peripheral economies - Greece, Ireland, Portugal and Spain - recover strongly from recession or weak growth, high unemployment and gaping budget deficits, a Reuters poll of 30 economists showed on Thursday.

Ireland and Spain are expected to fare best of the four countries in 2012, with 0.7 percent growth, and nothing at all for Madrid. Greece and Portugal are each expected to shrink by about 3 percent, according to the poll.

On a brighter note, the yield on Spanish 10-year bonds fell two basis points to 6.63 percent today.

The euro was last 0.3 percent stronger at US$1.3379.

"It is a case of two steps down and one step up for the euro," Carl Hammer, currency strategist at Nordea in Stockholm, told Reuters.

Europe's Stoxx 600 Index ended the day with 0.15 percent weaker. In Canada, the S&P/TSX Composite Index dropped 0.6 percent in afternoon trading. US markets were closed for the Thanksgiving holiday.

In other news, AT&T whose US$39 billion bid for T-Mobile USA is challenged by the US Justice Department, will record one-time costs of US$4 billion this quarter to reflect the risks of a collapse of the deal.


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