Europe Imploding (Again) Following Another Ugly Italian Bond Auction, WSJ Article Discussing French Bank Nationalization

Despite another round of unsubstantiated rumormongering by the FT yesterday (more on this in a second), investors in this morning's critical round of Italian bond issuance were nonplussed and demanded 10 pounds of flash with every bond, which in turn sent 5 year BTP yields to the highest since the introduction of the zEURo. If the purpose of the planted Debtwire/FT story was to make this auction attractive, one can only conclude that it failed. The result is yet another"Europe is Open" type market session, where everything is tumbling on Greek default and contagion fear, further stoked by a front-page WSJ story which says what we have been warning about every single day for the past 3 weeks (those pretty Libor charts that go from the lower left to the upper right are not just there to make the place pretty): namely that banks, in this case French mega institution BNP, no longer have access to dollar funding markets. The result: yet another increase in the actual 3M USD Libor rate, nearly the 40th day in a row, which in turn makes the dollar lock out even more painful. From the WSJ: ""We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore. He's not the only one worried. Société Générale has lost 22.5% of its value since the beginning of the summer. In early September, BNP released a statement—in English, which is highly unusual—explaining that it has abundant dollar liquidity and that BNP has nothing to worry about, unlike other banks. France's three biggest banks have been the subject of whisper campaigns about their solvency throughout the summer." It gets worse: "Now that the situation is bordering on catastrophe, analysts are suggesting that the government is set to start nationalizing France's banks. The banks have remained silent on the matter, and the government denies this talk." Well, whatever good will the FT tried to create with its rumors,the WSJ destroyed with its facts.

Backing up, here are the details of the latest set of atrocious Italian auctions:

  • Italian BTP auction for EUR 3.865bln, 4.75% Sep'16, bid/cover 1.279 (yield 5.60%)
  • Italian BTP auction for EUR 0.688bln, 4.50% Aug'18, bid/cover 1.61 vs. Prev. 1.17 (yield 5.59% vs. Prev. 4.950%)
  • Italian BTP auction for EUR 0.740bln, 4.50% Feb'20, bid/cover 1.636 vs. Prev. 2.05 (yield 5.49% vs. Prev. 3.580%)
  • Italian BTP auction for EUR 1.192bln, 4.00% Sep'20, bid/cover 1.486 vs. Prev. 1.33 (yield 5.47% vs. Prev. 3.920%)

The market, in a word, threw up all ovrr this. Here is Reuters with the disgusted sellside summary:


"Demand was fairly good for the "off-the-run" issues. Treasury placed more than the range mean on offer with an average bid-to-cover of 1.56.

"Demand for the new five-year bond was much worse.

"The market was and still is under heavy pressure, in a climate of risk aversion. The amount assigned therefore is not that insignificant, with prices and yields perfectly in line with the market."


"You can't call the auctions fantastic with a bid-to-cover for the new five-year somewhat modest if you consider the issue was very "cheap", with a high yield.

"The Bid-to-cover was modest also for the 'off-the-runs'. On the positive side 3.865 billion were assigned for the five-year, close to the maximum set of 4 billion. Only 2.62 billion of the other securities however were assigned.

"The key point that emerges are the sharply higher yields. The hope is that the rates don't grow any further. At these levels, albeit high, Italian debt is still sustainable. Above this, things become difficult."


"It could have been worse. Even though the concession is significant, the allocation for the new five-year is at the upper end of the range. Bid/cover has been on the weaker side but also the BTP April 16 previous five-year benchmark had a 1.25 bid/cover at its launch in April. The high yields are a longer-term sustainability concern but at the moment market access and placing the issue counts and that funding capabilities do not deteriorate further."


"Bid cover looks quite weak and in terms of pricing the concession was well in excess of 20 basis points on our metrics and also (the yield) is higher than the we saw at the Spanish five-year launched two weeks ago. Just looking at the price action this morning and yesterday, and what is going on in the CDS markets -- where we see Italian CDS printing new highs on almost a daily basis -- this all shows that demand from the private sector, and real money in particular, is still very very low and it take quite a lot these day to make investors buy the bond issues out of the periphery."


"While more than the middle of the target range is business as usual for the Italian Tesoro, usually even more pronounced though, the decision to avoid ultra-long bonds is a breach of the Italian issuance pattern. The big advantage of selling 7-9-year BTPs is that those bonds are under the scope of the ECB SMP.

"After settling close to 14 billion euros of bonds under the SMP last week alone, the pattern of 'Italy and Spain sell chunks of bonds, the ECB buys even more' has been confirmed. We firmly expect this dismal situation to prevail. Bunds at record low yield levels remain a clear buy in our view, especially as the risk/reward for long positions in BTPs or SPGBs is very poor."


"The new five-year, one has to say, the cover and the yield level have to be considered to be rather disappointing overall. But, with the way things are the moment in the euro zone, it's not really that surprising.

"Markets want to see decisive action and they want to see someone in control of the situation, nothing that we've had, be it at a domestic level in Italy, be it at a pan euro zone level, or above all from Germany, indicates that anyone really is getting to grips with presenting euro zone policy with one voice."


"Markets were positioned for a weak auction, but no failure and that's what they got. The five-year yield of 5.60 percent is probably the most telling sign that issuance of new bonds into this environment is very difficult as the SMP cannot operate in primary markets, but if the SMP keeps up the pace, these yields should stabilise over the course of the week."

"All in all 6.48 billion euros has been issued, out of the 5-7 billion target, which is fairly successful, but the strain the issuance has caused on the BTP market is telling. It is now up to the SMP to reign spreads in, but I think the point to take from these auctions is that yields appear to be on the rise for Italy, despite the ECB's effort via the SMP so far.


"Disappointing auction result with even the relatively soft cover seen here coming at an enormous price...Cover came in at 1.28 versus 1.93 at the last auction on 14 July - this latter sale was particularly well bid, however. Average cover for the last four five-year auctions comes in at 1.48 - still seeing today's cover on the soft side. Crucially, though, this demand comes at a clear price with the average accepted yield for this issue coming in at an elevated 5.6 percent."

So what rumor will the FT release today?

And lastly, going back to the BNP story, the bank has just slammed itself into a corner after saying that it has $30 billion in assets eligible to the Federal Reserve and assets eligible to central banks for €135 billion after haircuts. Wall Street interpretation: BNP is about to be bailed out by the Fed and ECB.

So what happens if the hole that has to be plugged is more than $30 billion and €135 billion?

Judging by the market, we may find out as soon as today...