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Capital Markets

Sovereigns face a financing crunch

If you thought the credit market was dead, it’s not. It is now called the sovereign debt market. The crisis has boosted demand for their paper, but a day of reckoning for the government bond markets is coming. Alex Chambers reports.

THE START OF the year saw the usual spectacle of high-grade issuers jostling for position in the new-issue pipeline, mostly meeting with a decent reception. But the failure of a 10-year Bund auction to be fully covered was greeted with general dismay. If the benchmark borrower for the eurozone can suffer a failed auction, what hope is there for the rest of its members?

It is a question that is becoming more frequently asked of sovereign and central bank policymakers. In February, outspoken German finance minister Peer Steinbrück, speaking in a political party setting, raised the prospect of weaker countries within the single-currency system being helped if they had problems financing their deficits. Of course such an outcome is best avoided: Lorenzo Bini Smaghi will not be the last executive board member of the European Central Bank to warn eurozone nations of the dangers of ballooning budgets, as he did in mid-February speaking in the European parliament.

According to Fitch, gross borrowing requirements of the EU 15 plus Switzerland this year are €2 trillion – including term debt and rolling over short-term debt. This is 45% up on 2008 – some 17% of GDP. For the largest five borrowers combined, this will be a record proportion of GDP, greater than previous highs set in the 1990s when Italy was borrowing far more than today.

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