Europe gets bond market respite, real economy pain (Reuters)

MADRID/FRANKFURT (Reuters) ? Spain and France gained fresh relief at bond auctions on Thursday, extending a rally in euro zone government debt markets since the European Central Bank flooded banks with cheap money in December.

But dismal corporate results showed Europe's "real economy" is suffering increasingly from the currency area's sovereign debt crisis after unemployment hit a new record this week.

Madrid and Paris drew healthy demand and saw their borrowing costs tumble despite having had their credit ratings downgraded -- Spain's by two notches -- by Standard & Poor's last month, following a similar strong showing by Italy.

"We're seeing all these doubts everybody had coming into the year about what impact will the rating downgrades have on primary and secondary market performance were unfounded," rate strategist Michael Leister of DZ Bank in Frankfurt said.

The 17-nation single currency area's debt crisis weighed heavily on company results announced on Thursday, tipping German giant Deutsche Bank (DBKGn.DE) into a fourth quarter loss as it reduced its exposure to the weakest European states.

Deutsche cut its holdings of Portuguese, Irish, Italian, Greece and Spanish bonds by 70 percent in 2011, annual results showed, partly to reduce sovereign risk but also to raise its core capital to meet tougher EU regulatory requirements.

Outgoing chief executive Josef Ackermann said private creditors were very close to a deal to reduce Greece's debt that would avert a first chaotic default in the euro area.

He urged Europe's central banks to make a contribution to plug a funding gap for a second bailout for Athens once banks write off about 100 billion euros of Greek debt, taking roughly a 70 percent loss on the net present value of their holdings.

"A solution on Greek PSI (private sector involvement) is close. Everybody has to make a contribution," Ackermann said.

The Greek government said it had completed the bulk of talks with international lenders on a new bailout but has yet to reach agreement on issues such as wages, pensions and the recapitalization of banks.

RUSH

A troika of the European Commission, the ECB and the International Monetary Fund is negotiating on conditions for a second rescue package after Athens failed to meet revenue targets or economic reform pledges in its first program.

Athens is rushing to wrap up talks with lenders on a 130-billion-euro bailout to unlock funds before big bond redemptions fall due next month. Bankers and officials have said the bailout must be finalized before a debt swap deal with private bondholders can also be announced.

Finance ministers of the euro zone will hold a special meeting next Monday, February 6, to discuss the Greek package.

The troika has demanded new measures that include lowering the minimum wage and cutting holiday bonuses.

But those demands have met resistance in Athens, where officials fear further cuts could deepen an already brutal recession and heap new burdens on long-suffering Greeks.

Government spokesman Pantelis Kapsis told MEGA television there were still three or four sticking points.

"The discussions are very tough," Kapsis said. "On the one side, there is pressure to restore the economy's competitiveness fast. We are saying that there is clearly an issue of competitiveness. On the other hand, there is also the question of recession which is very important for Greece."

With the focus in the euro zone squarely on public spending cuts and tax rises, gloomy news from three major European companies highlighted growing concern about the need for more emphasis on reviving growth.

Anglo-Swedish drugmaker AstraZeneca (AZN.L) said it was cutting 7,300 jobs and warned of a fall in profits of up to 18 percent this year, partly due to governments in Europe putting the squeeze on drug prices.

Multinational consumer goods group Unilever (ULVR.L) (UNc.AS), which has long drawn support from growth in emerging markets, predicted a tough year ahead as that support dwindles and demand in Europe and North America stays flat at best.

And domestic appliance maker Electrolux forecast tough market conditions in Europe this year as it unveiled a near 40 percent fall in annual earnings.

CHINESE HOPE

Chinese Prime Minister Wen Jiabao said Beijing is considering greater involvement in the euro zone's rescue funds - the temporary European Financial Stability Facility (EFSF) and the upcoming European Stability Mechanism (ESM).

Wen made the comments at a joint news conference with visiting German Chancellor Angela Merkel in Beijing, but he did not made any explicit financial commitment. He said China, which has made similar positive but non-committal comments in the past, is still studying how it might lend further support.

The ESM, a 500-billion-euro permanent bailout fund that is due to become operational in July, is expected to replace the EFSF, a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

Wen said it was important to resolve the euro debt crisis and Beijing wanted to support Europe's efforts in stabilizing the euro. But he also put the onus firmly on the Europeans to cut their debt, introduce structural economic reforms and rely on themselves.

Deutsche Bank's pretax loss of 351 million euros ($463 million) compared with a 707 million euro profit in the year-earlier quarter and was well below the 1.05 billion euro profit forecast in a Reuters poll of banks and brokerages.

"The results are a catastrophe," said analyst Dirk Becker from brokerage Kepler.

Deutsche Bank's cash cow -- revenue from trading debt products -- was down 38 percent in the quarter. The bank also set aside 380 million euros for litigation in the corporate banking and securities division.

Peers such as Morgan Stanley (MS.N), Goldman Sachs (GS.N), JPMorgan (JPM.N) and Bank of America (BAC.N) have also posted lackluster trading and investment banking revenue in the fourth quarter as clients shunned capital markets and put off deals because of the European debt crisis.

Ackermann, who was until recently chairman of the Institute of International Finance banking lobby, warned of severe dangers for the banking system if Greece was forced into a disorderly default or pushed out of the single currency.

"There is a substantial risk of contagion in case of a Greek default. A disorderly default would result in substantially higher losses for the system. I would rather not do the test," he said. "I am against the exit of any country from the Euro zone."

(Corrects first paragraph to make clear bank action in December)

(Additional reporting by Leigh Thomas in Paris, Edward Taylor and Arno Scheutze in Frankfurt, Catherine Hornby and Andreas Rinke in Beijing,; Writing by Paul Taylor, editing by Peter Millership)

Source: http://us.rd.yahoo.com/dailynews/rss/world/*http%3A//news.yahoo.com/s/nm/20120202/bs_nm/us_eurozone

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