Bond sales fall on growing budget deficits

Pan-European corporate bond sales fell during February, amid escalating worries about soaring budget deficits in continental Europe and the UK. These concerns were concentrated around Greece, which is struggling to contend with the largest budget deficit in the eurozone.

However, every country in the 16-member grouping is set to register a budget deficit for 2009 that falls above the EU’s 3% threshold. Bond issuers developed cold feet, cancelling bond sales during the month amid growing fears these spiralling budget deficits could derail the global economic recovery. Concerns over the outlook for Greece led to a rise in the cost of protecting European corporate bonds from the risk of default. In general, bond investors adopted a wait-and-see approach until the situation stabilises. Looking ahead, once the outlook clears and investor sentiment strengthens, bond supply could be swelled by a backlog of new issues.

The pound reached a nine-month low against the US dollar towards the end of the month. Speculation that ratings agencies are set to downgrade Greece’s debt rating fuelled fears the UK might have difficulty in coping with its own soaring budget deficit. However, Mervyn King, the governor of the Bank of England, said he would be “immensely surprised” if the UK were to lose its top AAA credit rating. The UK registered a £4.3bn budget deficit in January as the recession negatively affected tax receipts – its first January budget deficit since records began in 1993.

UK economic growth for the fourth quarter of 2009 was revised upwards from an initial estimate of 0.1% to 0.3%. Throughout the recent recession – the most severe on record for the UK – the UK economy contracted by 6.2% since the first quarter of 2008. The Bank of England reduced its forecast for UK economic growth in 2010 from 2.2% to 1.4%.

Consumer spending rose by 0.4% and posted its fastest increase since the first three months of 2008. UK consumer confidence reached its highest level for four months during February. Inflation hit 3.5% during January, forcing King to write a letter of explanation to the Chancellor of the Exchequer. UK house prices dropped for the first time in 10 months during February, hampered by unusually wintry weather and the return of stamp duty on purchases below £175,000. Overall, house prices remain 13% below their October 2007 highs.