Tags: Italy | Low | Cost | auction

Italy Raises $14 Billion at Much Lower Cost

Wednesday, 28 Dec 2011 08:48 AM

Italy saw investors more willing to part with their cash Wednesday as it raised 10.7 billion euros ($14 billion) in a pair of auctions, a sign that market jitters may be easing as the country presses ahead with its austerity measures.

The lower rates Italy had to pay are the first post-Christmas test of sentiment in the markets over the debt crisis that has engulfed the 17 countries that use the euro, and may be a signal that some of last week's massive injection of money into the European banking system from the European Central Bank may be filtering through into government bonds.

The scale of the falls in Italy's funding costs were dramatic and helped the country's benchmark 10-year bond yield in the markets ease further below the 7 percent level, widely considered to be unsustainable in the long-run.

The Bank of Italy said the average yield on its 9 billion euro ($11.8 billion) six-month bill offering was 3.251 percent, half the 6.504 percent rate it had to pay at the equivalent auction last month. And an auction of two-year bonds, which raised 1.732 billion euros ($2.3 billion), also saw the yield fall to 4.853 percent from 7.814 percent last month.

Italy is the eurozone's third-largest economy and is considered too big to save under the eurozone's current bailout funds. Markets have grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around 1.9 trillion euros ($2.5 trillion).

A further test of investors' appetite for Italian debt will come Thursday when the country offers more bonds, that could potentially raise a similar amount to Wednesday's offerings.

"Today's result sends a positive signal ahead of tomorrow three-year and 10-year auction," said Luca Cazzulani, deputy head of fixed income strategy at Unicredit.

Mario Monti, the country's new premier, got parliamentary approval last week for more spending cuts and tax increases intended to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of Italy's bloated pension system.

Later Wednesday, Monti is to chair a Cabinet meeting on a second wave of measures designed to boost Italy's anemic economy, which is expected to enter into recession in the first quarter of the new year.

The market responded positively to the auctions, with Italian shares outperforming their peers in Europe — the main FTSE MIB index was up 0.9 percent by lunchtime — and the yield on the country's 10-year bond back down at 6.75 percent. On Tuesday, the yield had spiked over 7 percent — a level that is considered unsustainable in the long run and eventually forced Greece, Ireland and Portugal to seek outside financial help.

The lower borrowing costs appeared a consequence of increased confidence that Monti's efforts will keep the country's finances on a sustainable path.

Demand for the bonds could also have been supported as well by a large infusion of credit to eurozone banks last week from the European Central Bank. There has been speculation that the stronger banks might use the cheap, long-term loans — on which the current interest rate is 1 percent — to purchase government bonds that carry higher interest rates and profit from the difference.

That could support both government and bank finances. But it would run contrary to efforts by many banks to lower their exposure to bonds issued by heavily indebted governments.

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