MADRID: Investors snapped up eurozone debt Tuesday despite a slew of sovereign downgrades, pouring money into the region?s bailout fund as well as into Spanish and Greek paper.
Buyers lined up for the debt auctions, showing a new appetite for risk since the European Central Bank loaned nearly half-a-trillion euros at a rock-bottom rate to the region?s banks last month.
Standard & Poor?s downgrades of nine European nations? sovereign ratings Friday including Spain?s and Greece?s, and its decision to remove the eurozone bailout fund?s AAA rating Monday, failed to dissuade investors.
?It was expected because it is all to do with the ECB?s three-year long-term refinancing operation,? said Edward Hugh, an independent economist based in Barcelona.
The three-year loans from the Frankfurt-based central bank, carrying a 1-percent interest rate, allowed the banks to buy up sovereign bonds and pocket the higher returns, he said.
They also enabled the banks to refinance their own borrowing.
But the ECB operation was not likely to free up credit in the system, Hugh said, because the banks were using the money to avoid writing off existing bad loans instead of lending to new businesses. ?That?s what is freezing the whole thing up,? he added.
In the meantime, with the ECB money in the banks? pockets, the debt auctions passed off smoothly.
Demand outstripped supply by more than three-to-one in first-ever auction of six-month debt by the European Financial Stability Facility, the backstop for eurozone sovereigns in case of collapse.
Germany?s Bundesbank, which organized the auction, said it received 4.6 billion euros? ($5.9 billion) worth of bids for 1.5 billion euros of six-month bonds, at an average yield of 0.2664 percent.
Standard and Poor?s downgraded the EFSF Monday by one notch to AA+ but said it would restore its top AAA ranking if the fund obtains additional guarantees.
Spain?s borrowing costs plummeted in an auction of 12- and 16-month paper, allowing it to raise 4.88 billion euros with demand outstripping supply by more than three times.
Spain?s new right-leaning Popular Party government, which took power last month after beating the Socialists in Nov. 20 elections, is battling to regain the confidence of the markets after overshooting its deficit target in 2011.
Prime Minister Mariano Rajoy has vowed to meet the 2012 goal of reducing the deficit to 4.4 percent of GDP, even if that means he must find a way to lop an estimated 40 billion euros off the budget.
Even Greece ? whose debt negotiations with private creditors are at the heart of market concerns over the eurozone?s sovereign debt outlook ? said demand outstripped supply by three times in a short-term debt sale.
The country managed to raise 1.625 billion euros in three-month debt ? well above the original target of 1.25 billion euros ? as the rate eased to 4.64 percent from 4.68 percent.
Bailed out in May 2010 by the EU and International Monetary Fund and in the process of nailing down a second rescue plan, Greece faces tough talks with private creditors Wednesday to wipe 100 billion euros off its total debt of around 350 billion euros.
But other data showed strains lying beneath the surface in the eurozone.
Banks in the 17-nation bloc parked a record 502 billion euros in poorly remunerated overnight deposits with the ECB, latest figures showed, suggesting they were unwilling to risk lending that money to each other at more favorable rates.
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