Investors Flock to European Debt Offerings

Posted January 17th, 2012 at 11:10 am (UTC-5)
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Investors ignored the credit downgrades for European governments on Tuesday and rushed to buy notes offered by debt-ridden Spain and Greece, as well as bonds sold by the eurozone’s bailout fund.

One of the world’s three main credit rating companies, Standard & Poor’s, downgraded the credit standing of nine European countries and the bailout fund in the last few days. But investor demand for the Spanish, Greek and bailout fund notes far exceeded the supply.

Analysts said the debt offerings were still attractive to European financial institutions because they recently have been able to secure three-year loans from the European Central Bank at a 1 percent interest rate. That is money they then can use for investments while pocketing higher financial returns.

Borrowing costs for both Spain and Greece fell compared to previous debt auctions. Spain sold more than $6 billion in one-year notes at an interest rate just above 2 percent — more than two percentage points below a similar auction last month. The interest rate for Greece, Europe’s most financially troubled government, declined slightly.

The Athens government plans to restart talks Wednesday with its private international creditors to try to reach an agreement to cut about $127 billion from the amount it owes them. The negotiations stalemated last week and their outcome is uncertain.

Greece is trying to negotiate the debt reduction in an effort to secure a new $165 billion bailout, its second in two years, to avoid a default on financial obligations it owes in March. European leaders say they will not approve the new bailout unless Greece completes the debt reduction plan with its creditors and imposes more unpopular austerity measures.

The eurozone — the 17-nation bloc that uses the euro currency — saw a slightly larger than expected drop in the December inflation rate, down to 2.7 percent. That is still well above the central bank’s 2 percent target. Eurostat, the European Union’s statistics office, had predicted the December rate would drop to 2.8 percent from November figure of 3 percent.

The inflation rate for Britain — which is not part of the eurozone — fell in December by the largest margin since 2009. The government said the rate dropped from November’s 4.8 percent figure down to 4.2 percent.

Meanwhile, Germany’s investor confidence rose in January, suggesting the German economy remains strong and economic activity should stabilize in the first half of 2012.