European Stocks Erase Gains After Italy Auctions Bills at Record Yield

By Peter Levring - Nov 10, 2011 5:30 PM GMT+0700

European stocks erased their gains after Italy sold one-year bills at the highest average yield in 14 years. U.S. index futures rose and Asian shares fell.

European Aeronautic Defence and Space Co. rose 5.9 percent after its third-quarter profits surged and the German government agreed to buy a 7.5 stake in the company from Daimler AG. (DAI) Svenska Cellulosa AB gained 6.2 percent after agreeing to buy Georgia-Pacific LLC’s European tissue operations.

The benchmark Stoxx Europe 600 Index was unchanged at 236.34 at 10:28 a.m. in London, after falling as much as 1.7 percent and rising as much as 0.8 percent. The gauge has rallied 9.9 percent from this year’s low on Sept. 22 as German Chancellor Angela Merkel and French President Nicholas Sarkozy pushed for expanding the European Financial Stability Facility, the bailout fund. Standard & Poor’s 500 Index futures added 1 percent, while MSCI Asia Pacific Index fell 3.3 percent.

“Italy cannot sort this out on its own,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “The only thing that’ll work now is if Merkel and Sarkozy come up with some real money for the EFSF to remove any uncertainties.”

Italy raised 5 billion euros by selling 366-day bills at an average yield of 6.087 percent, the highest since September 1997. That’s also up from 3.570 percent on similar-maturity securities sold last month.

Systemic Importance

The nation’s bonds rose before the auction as the European Central Bank was said to purchase the securities, according to three people familiar with the transactions. The ECB was not immediately available for comment.

At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and the eighth-biggest economy. Prime Minister Silvio Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity measures.

Stocks yesterday dropped as Italian bond yields surged to euro-era records. The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA prices.

German Finance Minister Wolfgang Schaeuble told lawmakers Italy may need to consider a request for European Union aid.

Austerity Measures

Italy’s Senate rushed to pass debt-reduction measures that clear the way for establishing a new government in a bid to restore confidence in Europe’s second-biggest debtor.

The Senate will vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies should vote the following day, and Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned RAI television.

In Greece, President Karolos Papoulias called a meeting with political party leaders for today. Squabbling over who will be the next premier pushed unity government aims into disarray and undermined the country’s bid to secure the bailout funds needed to prevent a financial collapse.

Prime Minister George Papandreou met with Papoulias in Athens yesterday as criticism grew over delays in naming a new prime minister.

EADS, Vedanta

EADS advanced 5.9 percent to 21.14 euros after Europe’s biggest defense contractor reported higher profit for the third quarter. The company also said that the Airbus A350 jet will be delayed by a few months.

Net income rose to 312 million euros from 13 million euros a year earlier, EADS said. Analysts surveyed by Bloomberg had estimated a loss of about 30 million euros. Sales dropped 4 percent to 10.75 billion euros.

Vedanta Resources Plc (VED) slid 4.1 percent to 1,199 pence. The largest copper producer in India said fiscal first-half profit dropped 92 percent on foreign-exchange losses. Net income fell to $27.8 million in the six months through Sept. 30 from $337 million a year earlier.

K+S AG retreated 4.3 percent to 42.60 euros as Europe’s largest producer of potash pared its outlook for sales and profit this year and the next as economic volatility prompts wholesalers to scale back orders.

Anglo American Plc rose 3.4 percent to 2,433.5 pence after selling a 24.5 percent stake in its Chilean copper unit to Mitsubishi Corp. for $5.39 billion.

Svenska Cellulosa, Europe’s biggest tissue maker, gained 6.2 percent to 97 kronor after agreeing to buy Georgia-Pacific LLC’s European tissue operations for 1.32 billion euros to strengthen its offering with brands including Lotus.

To contact the reporter on this story: Peter Levring in Copenhagen at Plevring1@bloomberg.net or

To contact the editor responsible for this story: Andrew Rummer in London at arummer@bloomberg.net;