Austria may have to pay higher yields at a bond sale today as it’s roiled by an economic crisis in Hungary, prompting investors to favor the Netherlands, which also auctions debt. “We expect the Dutch auction to go pretty well, in contrast with Austria,� Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, said in a phone interview on Jan. 6. “Given what could play out with the political unknowns in regards to the Hungary situation, the risk of a poor outcome is not insignificant.� Austria plans to issue 1.32 billion euros ($1.7 billion) of securities maturing in September 2016 and April 2022, the Federal Financing Agency said on Jan. 3. The Dutch State Treasury today auctioned about 3.11 billion euros of April 2015 notes at an average yield of 0.853 percent. Austrian bonds have underperformed their Dutch counterparts this year on concern the nation’s lenders, which have lent the most to Hungarian borrowers, will be hurt after a confrontation between Hungary’s premier and the central-bank chief caused negotiations on an international bailout to be suspended last month. The euro-bloc members, both rated AAA, are also at risk of a slowdown in economic growth as the region’s sovereign debt crisis chokes expansion. Yields on Austrian 10-year bonds rose to 120 basis points above those of similar-maturity Dutch securities at the end of last week, from 72 basis points on Dec. 30. Austrian debt lost 2.4 percent this year through Jan. 9, compared with a 0.2 percent decline for the Netherlands, indexes by Bloomberg and the European Federation of Financial Analysts Societies show. Hungary’s bonds lost 0.4 percent. Austrian Claims Austria’s claims on Hungarian households, companies and the public sector stood at $41.6 billion at the end of June, compared with $23.4 billion for Italian lenders, according to the Basel, Switzerland-based Bank for International Settlements. Erste Group Bank AG owns Hungary’s second-biggest lender, with Raiffeisen Bank International AG owning the country’s fifth- largest. “Austria has come under pressure, largely reflecting exposure to Hungary, which is under increased solvency pressure,� Padhraic Garvey, global head of developed-country debt and rates strategy at ING Groep NV in Amsterdam, said in a phone interview on Jan. 6. “The link between the two comes through Austrian banks’ exposure to Hungary. Investors will have a choice: they can buy the rich Dutch bonds or the cheap Austrian bonds.� Bond Yields The yield on the Austrian 10-year bond fell five basis points, or 0.05 percentage point, to 3.23 percent at 9:56 a.m. London time. Its high last year was 3.88 percent on April 11, and it dropped to as low as 2.48 percent on Sept. 23. The similar-maturity Dutch (GNTH10YR) yield ranged between 3.77 percent and 2.10 percent. It rose three basis points today to 2.25 percent. “Austria undoubtedly will have to pay a higher price to sell its bonds, but I don’t see the danger of Austria going belly up,� said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Austria’s rating is at risk, but that applies to every other euro country.� Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs. Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion last year, according to data compiled by Bloomberg. Debt Sales At $428 billion, Italy has the most coming due this year in the euro region, followed by France at $367 billion and Germany at $285 billion, year-end data show. Austria is at $23.6 billion, while the Netherlands has about $82 billion, the figures show. Austria plans to increase bond sales as much as 50 percent this year, Martha Oberndorfer, who heads the country’s debt agency, said last month at a presentation to the nation’s primary dealers. The debt agency will issue 20 billion euros to 24 billion euros of bonds this year, up from about 16 billion euros in 2011, according to the presentation. Including instruments such as treasury bills, private placements and loans, total issuance will be 27 billion euros to 30 billion euros, compared with about 21 billion euros last year. In an investor note dated Jan. 4, analysts at ING forecast total euro-region issuance will be 956 billion euros this year. Germany, Italy and Spain also auction bonds this week, while Greece sells six-month bills today. Fitch Cut Fitch Ratings cut Hungary’s long-term foreign-currency ratings by one level to BB+ on Jan. 6 after similar reductions by Standard & Poor’s and Moody’s Investors Service, saying there remained doubts whether the nation will submit to conditions for aid from the International Monetary Fund and the European Union. The risk of the country failing to reach an agreement sent the forint last week to a record low against the euro and lifted the government’s borrowing costs to the highest since 2009. Talks on Hungary’s second bailout in four years broke down last month as the government refused to alter a central-bank law that the EU said threatens the monetary authority’s independence. Hungary is ready to accept “any kind� of credit line that strengthens the country’s market financing, Prime Minister Viktor Orban said in an interview on Jan. 8 with state news service MTI. Austria and the Netherlands are also at risk of being downgraded by S&P, which said on Dec. 5 that it might cut the rankings of 15 euro members, including the six AAA states, as the debt crisis had raised “systemic stress� in the region. Economic Slowdown An economic slowdown in Austria this year will be more abrupt than forecast earlier as government budget cuts push up unemployment and delay a rebound in the production of goods and services until 2013, the Wifo research institute in Vienna said Dec. 21. Gross domestic product is expected to rise 0.4 percent, the group said, down from a September prediction of 0.8 percent growth, and 1.8 percent in July. Economies in the region are slowing as a solution to the sovereign-debt crisis, which prompted Greece, Ireland and Portugal to seek international bailouts, continues to elude policy makers. The IMF will make a “fairly substantial� cut to its forecast for global economic growth this year, Olivier Blanchard, the body’s chief economist, said on Jan. 6. In September, the Washington-based fund lowered its forecast for global growth to 4 percent in 2012 and warned of “severe� repercussions if Europe failed to contain its debt crisis. Recession Risk The Dutch economy, the fifth-largest in the euro area, probably fell back into a recession in the second half of last year as the crisis intensified, the country’s central bank said in December. The economy is set to shrink 0.5 percent in 2012 after expanding 1.5 percent last year, the Bureau for Economic Policy Analysis CBP said Dec. 13. The finance ministry raised this year’s borrowing requirement on Jan. 4 to 101.5 billion euros from a December forecast of 99.6 billion euros. About 60 billion euros of that will be covered by bond issuance. Austria issued 550 million euros of the 4 percent 2016 notes on Nov. 8 at an average yield of 1.96 percent. It issued the 3.65 percent 2022 debt on July 5 at an average yield of 3.528 percent. The Dutch 0.75 percent 2015 securities haven’t been previously sold. The government issued 2015 bonds on Oct. 25, when it sold 1.02 billion euros of 3.25 percent securities at a yield of 1.404 percent. The Austria bonds are “likely to be quite expensive for the Treasury to get away,� said Rabobank’s Graham-Taylor. “This shows how Austria has moved out of the group of core AAA countries, away from Germany, Holland and Finland, and nearer to France.� To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Jurjen van de Pol in Amsterdam at jvandepol@bloomberg.net To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; James Ludden at jludden@bloomberg.net

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