Asian Markets Fall Following US Markets on EU Worries

The markets in Asia kept pace with falls for U.S. stocks, with investors cautious ahead of today’s auction of long-dated Italian debt. Yesterdays, short term auction of Italian debt went off without a hitch, but most investors feel that the ECB and IMF will continue on the short term to assist the government and therefore the risk was minimal. Today’s auction will require that investors take a long term look at the Italian economy and any future bailouts or haircuts. A release from the European Central Bank (ECB) showing it had significantly boosted lending to banks also added to concerns about the debt-stricken region, and pushed the euro to a 15-month low. US markets dipped into negative territory for the day and also for the year.

The ECB said that it’s lending to euro-area banks leapt last week, as the central bank strived to keep credit moving in Europe.

Economist noted a release from the European Central Bank showing its balance sheet rose to a record 2.73 trillion euros, as lending to banks jumped from €214 billion to €879 billion in just one week. This is worrisome news for the markets

The euro showed little reaction after the Italian government sold €9 billion ($11.8 billion) of six-month bills in an auction on Wednesday, again, most investors are assured that in the short term, Italy will be bailed out or funded by EU funds via the ECB or IMF facilities.

The sale produced an average yield of 3.25%, down from more than 6.5% at a sale of six-month bills in late November. Bids exceeded demand 1.7 times versus 1.5 times at the November sale.

For the month euro has lost 3.8%, It rose as high as about $1.49 in May before growing worries about euro-zone members’ ability to finance their own debt spread to larger economies and bond markets — namely, Spain and Italy. The lack of confidence in the EU leadership to develop a long term plan has investors nervous.

2012 is shaping up as the year when the euro-zone’s Franco-German leadership must decide whether or not to save the euro. They must decide whether they should fully commit to the project and embrace all that this will entail for moral hazard, treaty obligations and domestic political popularity, or allow the project to fail with potentially catastrophic consequences. Without a plan the euro will sink on its own causing financial havoc with the market and many countries. As debt continues to rise, the question comes will the EU be able to bail itself out and will all the EU countries want to continue to support the lending facilities and emergency funds.