Euro Debt to Hit Maximum Stress

NEW YORK (TheStreet) -- The first quarter of 2012 will shape the European bond markets for the rest of the year as sovereigns and corporates ready their borrowing plans.

So far, industry watchers aren't hopeful.

"The first quarter is the maximum point of stress for Europe," said David Owen, chief European economist with Jefferies Securities in London. "There are billions in country and corporate debt that are set to be auctioned over the next few months. Many things could go wrong."

Corporate bank borrowers such as Credit Agricole, BNP Paribas and Societe Generale were given more time, after a lifeline was thrown to them by the European Central Bank when it flushed liquidity into the system on Dec. 21. But they will need to return to the capital markets in short order.

That means first on the firing line are country borrowers Germany and France.

Germany is scheduled to kick off the euro debt bonanza by auctioning €5 billion of its January 2022 bond on Wednesday. France will then follow up with a Thursday auction €7 billion to €8 billion euros, focusing on longer-dated maturities that include 30-year notes.

Given sovereign bonds recent history, next week could be bloody.

Germany's last auction of that same maturity in November ramped up the European debt crisis as traders were caught off guard by the lack of interest debt issued by the continent's most stable economy. During that auction, the Bundesbank had to step in and purchase a third of the €6 billion of debt after private investors scoffed.

While France fared much better in its last auction in October -- when it sold €1.57 billion of 10-year notes at an average yield 3.18% -- the bonds may not trade as well in this round as fixed-income pros await an inevitable downgrade from Standard & Poor's.

"France is the most exposed to a further downgrade, and obviously the fundamentals in that country aren't great anyway," said Owen. "The real concern is that if you have one or two bad auctions -- Germany and France -- you begin to splinter the core of Europe."

The two sovereign sales begin a multi-year struggle for Europe sovereigns and corporate issuers to convince investors to buy their debt at reasonable yields that won't push them further into crisis or even default.