National Bank of Greece ADR (fka NBGGY)

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New Year To Start With Old Problems, Heavy Funding In Euro Zone

FRANKFURT (Dow Jones)--With Portugal hitting the debt markets already next week, the euro zone looks set to start the new year much as it began 2010--under threat from countries with weak economies and shaky public finances.

But this time around, the first auctions of the year could be decisive.

Despite the Greek and Irish bailouts, 2010 ended with debt-laden euro-zone countries facing escalating borrowing costs, and it is now feared Portugal will soon need foreign help to stay afloat.

"This will be a question of make or break," said Rene Defossez, a strategist at French bank Natixis. "If the first 2011 issues are completed without too many difficulties, this will bode well for the rest of the year in as much as it would suggest investors have taken on board the risk presented by peripheral debts."

Although the so-called peripheral countries have improved their situation through budget cuts and tax increases, their funding needs remain heavy, because most have a higher amount of debt to pay off in 2011.

Natixis expects EUR824 billion of euro-zone government bonds to be auctioned in 2011, with 10% of the planned supply expected to come in January, Defossez said.

"If yields on issue surge, other countries could be tempted to call on the European Financial Stability Facility, with the obvious risk that this facility will be insufficient to cover the needs of all liquidity-stressed countries," Defossez said. The temporary EUR440 billion fund was set up by the European Union after the Greek debt crisis and has already been used to help Ireland.

Portugal is the biggest question mark right now. Intesa Sanpaolo's forecast scenario assumes the country will turn to European Union for help in the first quarter. But bank also thinks no further bailouts will follow.

"We believe the euro government bond crisis should be overcome without other countries reaching the point of default," Intesa Sanpaolo strategists said. If tensions mount but don't lead to a bailout, the expected trend of euro spreads would not necessarily change a lot, they said.

With European leaders still debating how to set up a permanent mechanism for dealing with financial crises, the European Central Bank's intervention operations seemingly remain the only near-term stabilizing factor for the peripheral markets, Nomura said. The bank continues to buy euro-zone sovereign bonds to ease the borrowing costs in struggling countries and contain the crisis.

"Heading into the new year, it is hard to see this changing," especially with European Union leaders pushing back the final deadline for collective action until March, Nomura said.

France will be the first euro-zone country to sell debt in 2011, auctioning EUR8.5 billion treasury bills Monday, or debt at the shortest end of the yield. Treasury bill supply is also scheduled from Belgium, the Netherlands, and Portugal, which will auction EUR500 million of six-month T-bills Wednesday.

The first auction of bonds--or debt with medium, long- or ultra-long maturity--will come from Germany, the euro-zone benchmark. Germany will auction EUR5 billion of the 2.50% January 2021 bund Wednesday. France will be the week's other bond issuer, on Thursday offering EUR7.5 billion to EUR9 billion of three series of OATs, or long-term government bonds, maturing in 2020, 2026 and 2029.

"Investors will be putting new money to work next week, and dealers are short, so the German and French auctions will go well," a trader said.

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