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Europe needs 500 billion euros in cash after the loss of the best bond buyers

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(Bloomberg) — As winter approaches, governments across Europe are frantically crafting aid programs to protect their citizens from skyrocketing energy costs stemming from Vladimir Putin’s invasion of Ukraine. There are electricity price caps in France, petrol discounts in Italy, and heating bill subsidies in Germany.

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These measures cost a lot of money, running into hundreds of billions of euros, and inflated financing needs in the region well above historical standards for the fourth year in a row. The problem with all of this is that, unlike in the past eight years, when the European Central Bank was happy to print money and buy as many bonds as possible, governments will have to find new financiers.

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So quickly, in fact, will it be the focus of ECB policy that analysts estimate will force the region’s governments to sell more new debt on the bond market next year – upwards of €500 billion on a net basis – than at any time this century . And bond investors, scarred by the very high inflation the European Central Bank is trying to stamp out, are in no mood to tolerate the fiscal handouts right now. As Liz Truss found out, they will set the price.

Strategists say that even regional powerhouses such as Germany and France will not be spared a jump in borrowing costs. BNP Paribas SA sees benchmark German bund yields rising by about 1 percentage point by the end of the first quarter.

And for Italy, the most financially vulnerable of the EU’s major economies, the stakes are much higher. Citigroup analysts estimate that by early next year, it will take a yield premium of about 2.75 percentage points on benchmark bonds to entice investors to buy Italian bonds. That level would set off alarm bells in Brussels and reignite nervous speculation that has waxed and waned over the years about the country’s long-term ability to make debt payments.

“If you move to an environment where European governments issue more debt to meet the energy crisis, and on top of that they get quantitative tightening, the cost of borrowing will go up dramatically,” said Flavio Carpenzano, investment director at Capital Group in London. “Markets will start to question the sustainability of debt in countries like Italy.”

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Europe’s energy tab tops €700 billion as winter sets in

Barclays plc sees net European government bond issuance rising to nearly €500 billion in 2023, a record high. This figure represents additional financing needs should the economic downturn prove more severe and also takes into account other sources of funding outside the bond markets. The net amount could rise another 100 billion euros if the European Central Bank starts curbing its reinvestment, the so-called quantitative tightening.

In Germany, the epicenter of the region’s energy crisis due to its dependence on Russia, measures include help with heating bills, grants and curbing gas prices. France applied ceilings on gas and electricity prices. S&P Global Ratings recently shifted its view of the nation to negative from stable, citing “highly accommodative” fiscal policy.

Italy’s net monetary requirements — which includes total supply, redemptions, free float coupons and central bank inflows — are set to increase by 48 billion euros, the largest amount as a percentage of GDP after Portugal, Citigroup estimates.

The Italian bond fad may turn into a new fad by next year

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“Even if Italy follows the European line, it will export a lot,” said Ario Emaminejad, a fund manager at Fidelity International. “BTPs are not likely to trade near 150 basis points sustainably, as you ultimately have to price in all the tail risk of quantitative tightening and issuance with limited upside.”

Attractive returns

Global fixed income markets have already gone through a significant repricing in what has been a bad year for bonds. At the end of 2021, the German 10-year yield was -0.18%. On December 8, it was 1.79%.

The European Central Bank is not alone in turning the page on ultra-loose monetary policy. The Fed began quantitative tightening six months ago, shrinking its balance sheet by about $330 billion as of November 30, while the Bank of England is actively selling gold bonds to the market.

The question now is how far investors will pay the returns until they feel adequately compensated. Growing speculation that the European Central Bank will start slowing the tightening cycle has already spurred a rally, while an economy in recession will coax investors out of risky assets and into the comparative safety of sovereign securities.

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The larger supply should also help ease a chronic shortage of high-quality assets after the European Central Bank spent years unloading bonds to lower borrowing costs as it moved from one crisis to the next.

“It is 100% true that we will see a huge change on the supply side – but conversely, we could see a huge change on the demand side as well,” said Annalisa Piazza, Fixed Income Research Analyst at MFS Investment. Management. “The returns are interesting, and sooner or later central banks around the world will be nearing the end of the tightening cycle.”

common interest

But recent gains may fade, given the challenges ahead in the early part of 2023, not least because too many governments usually handle initial issues.

The recent sell-off in the UK highlighted the speed with which bond markets could move as expansionary tax cut plans under former Prime Minister Liz Truss finally forced the BoE into crisis.

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There is also a chance that the ECB will unveil a QT plan that is more aggressive than expected, although policymakers have tried to defuse these concerns. Bundesbank President Joachim Nagel said in November that the reduction of the ECB’s balance sheet should happen “gradually”.

The ECB’s snapping up of QT Day should not depend on market calm

Risks associated with a rise in the net supply of European government debt was the most recurring concern at the November meeting of the European Central Bank’s bond market contact group. One member of this group is Amundi SA, Europe’s largest asset manager. Sovereign issuances should be watched closely, strategists wrote in a recent report.

“More bonds in 2023 may look like more bonds without QE,” said Giles Gill, head of European interest rate strategy at NatWest Markets.

– With assistance from Sujata Rao.

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(Pricing is updated in paragraph 11.)

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MicroStrategy is at its lowest level since 2020 after the sales were revealed

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(Bloomberg) — Shares of MicroStrategy touched their lowest level since August 2020 after the enterprise software company, which in recent years has been known as the largest buyer of bitcoin, revealed its first sale of the token.

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The stock fell 1.1 percent to $136.63 on Thursday, down 75 percent this year. Bitcoin rose less than 1% to around $16,590 and is believed to have fallen 64% since the start of the year.

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In a filing on Wednesday, MicroStrategy said it acquired approximately 2,395 Bitcoin between the beginning of November and December 21 through its subsidiary MacroStrategy, and paid out approximately $42.8 million in cash. It then sold 704 of the tokens on Dec. 22 for a total of about $11.8 million, citing tax purposes, before buying another 810 of them two days later.

Matt Malley, chief market strategist for Miller Tabak + Co. Step down as CEO. This news means they don’t seem to want to do that anytime soon.”

Overall, MicroStrategy held about 132,500 bitcoins worth over $4 billion USD as of December 27th. The company paid an average purchase price of $30,397 per bitcoin.

“Given MicroStrategy’s $2.4 billion in leverage, we believe the company may have a lot of leverage over Bitcoin, and may face some liquidity risk,” Jefferies analyst Brent Thiel wrote in a note on Wednesday. Thill has an “underperform” rating on the stock and a price target of $110.

Over the years of the pandemic, MicroStrategy has become well known for its Bitcoin takeovers, largely led by Saylor. Earlier this year, Saylor stepped down from that role and now serves as CEO at the company and continues to lead its bitcoin strategy.

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MicroStrategy was trading around $120 before Saylor first announced the company’s Bitcoin purchases in 2020. The stock reached an all-time high of $1,315 in February 2021.

(Updates to include the stock’s closing price in the second paragraph.)

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Bankman-Fried May File Petition in New York Federal Court Next Week Before Judge Louis Kaplan By Cointelegraph

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Former FTX CEO Sam Bankman-Fried is set to appear in court on the afternoon of January 3 to enter a lawsuit over two counts of wire fraud and six counts of conspiracy against him related to the collapse of cryptocurrency exchange FTX, according to Reuters. mentioned on December 28, citing court records. Bankman-Fried will appear before District Judge Lewis Kaplan in Manhattan.

Judge Kaplan was appointed to hear the case on December 27 after the original judge in the case, Ronnie Abrams, Resigned herself because of connections between FTX and the law firm Davis Polk & Wardwell, where her husband is a partner. The company provided advisory services to FTX in 2021.