Tags: italy | bond | euro | crisis

Italy Set for ‘Sizeable’ Cost Increase at Bond Sale

Monday, 28 November 2011 06:36 PM

Italy may again be forced to pay above the 7 percent threshold that prompted Greece, Portugal and Ireland to seek aid when it auctions as much as 8 billion euros ($11 billion) in bonds Tuesday.

The Rome-based Treasury aims to sell as much as 3.5 billion euros of a three-year bond, 2.5 billion euros of 2022 bonds and 2 billion euros in 2020 bonds. Italy had to pay more than 7 percent in debt auctions Monday and on Nov. 25. Tuesday’s results are due shortly after 11 a.m. Rome time.

“The Treasury will experience a sizeable increase in the cost of funding,” said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, noting that a similar- maturity 2014 bond yielded 4.93 percent at a sale on Oct. 28. “We see a risk that the 3-year and the 10-year are issued at roughly the same level.”

The auction is competing this week with sales of securities in Belgium, France and Spain of as much as 10 billion euros. Italy's Treasury Monday sold 567 million euros of 2023 inflation-linked notes to yield 7.3 percent, as investors shunned Italian bonds amid concern about the sustainability of a debt load which is bigger than Spain, Greece, Ireland and Portugal combined. Prime Minister Mario Monti is due to announce measures to cut the 1.9 trillion euro debt as early as next week.

‘Very Challenging’

Tuesday’s sale amounts “to a modest amount in normal times, but a very challenging one these days,” Eugenio Scalfari, the 87-year-old founder of newspaper la Repubblica, wrote in an editorial on Sunday. “The auction could have been canceled and postponed as the Treasury could do without it, but that would have been a very bad signal to the markets.”

The premium investors demand to hold Italy’s 10-year bond instead of German bunds, the region’s benchmark, fell six basis points to 493 basis points Monday, down from 499 basis points on Friday. The 10-year bond yield was 7.23 percent.

The European Central Bank started buying Italian debt on Aug. 8 to tame borrowing costs after the 10-year yield had surged to euro-era record of 6.4 percent. After falling to under 5 percent around mid-August, the yield resumed rising and reached a new record of 7.48 percent on Nov. 9.

“Markets remain very nervous, but we believe the current levels and discounts will prove adequate for successful auctions,” Giuseppe Maraffino and Huw Worthington, fixed-income strategists at Barclays Capital in London, said Monday in a note to investors.

OECD, Moody’s

Italy, whose economic growth has trailed the euro-region average for more than a decade, may contract next year as the debt crisis damps confidence and complicates financing, the Organization for Economic Cooperation and Development said Monday in its semi-annual outlook.

Forecasting Italy to expand 0.7 percent this year before shrinking 0.5 percent in 2012, the Paris-based OECD called for “decisive action” by Monti’s government to meet the target of a balanced budget in 2013 and implement the structural reforms that Italy has promised to the European Union.

Moody’s Investors Service said in a report Monday that the “rapid escalation” of Europe’s debt and banking crisis is threatening all of the region’s sovereign ratings. The rating company said the probability of multiple defaults by euro-area countries is no longer negligible and the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise.

“Over the past few weeks, the likelihood of even more negative scenarios has risen,” Moody’s said in the report. “This reflects, among other factors, the political uncertainties in Greece and Italy.”

No IMF Plan

The International Monetary Fund denied Monday a report on Italy’s La Stampa newspaper saying it’s discussing a rescue plan of as much as 600 billion euros to support Italian efforts to restore investor confidence. The Washington-based lender isn’t in discussions on such a program with authorities in Rome, a spokesperson for the fund said in an e-mailed statement.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he was “encouraged” about Italy’s fiscal-consolidation strategy after meetings last week in Rome, his spokesman Amadeu Altafaj told reporters in Brussels Monday. Rehn “did not discuss” the possibility of Italy tapping international aid, Altafaj said.

Possible Measures

Italy’s new government may reinstate property taxes, overhaul the tax system and pension rules, and modify labor laws, Monti, who is also finance minister, told Parliament in Rome earlier this month.

Finance ministers from the 17-member euro region meet Tuesday in Brussels before an EU summit on Dec. 9 as the region’s debt crisis worsened. Government bond yields for both Germany and France, Europe’s two largest economies, climbed last week as a German bond auction failed to get bids for 35 percent of the 10- year debt on offer. Italy also had to pay almost 7 percent to sell 8 billion euros in six-month bills on Nov. 25.

“It looks like contagion is spreading to core countries” in Europe, Rehn told the Italian parliament on Nov. 25.

Italy needs to return to growth to cut debt as rising yields make it hard to control borrowing costs, Bank of Italy Governor Ignazio Visco said in a speech in Catania, Sicily, last week. “The growing tension on financial markets in recent months has made for a precarious equilibrium” in the country’s public finances, said Visco, who succeeded new ECB President Mario Draghi on Nov. 1.

Assuming the government meets its fiscal targets, Italy’s debt will stabilize or fall starting next year “even if interest rates on government securities were to undergo significant increases,” Visco said in a Nov. 2 report.

The Rome-based central bank said that even if yields on “all new issues of government securities” started to increase on Jan. 1 by 2.5 percentage points, debt would still decline to 115.5 percent of GDP in 2014. Should economic growth also come to a standstill in the next three years, debt would “stabilize at just over 120 percent of GDP,” Visco said in the report.

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Italy may again be forced to pay above the 7 percent threshold that prompted Greece, Portugal and Ireland to seek aid when it auctions as much as 8 billion euros ($11 billion) in bonds Tuesday. The Rome-based Treasury aims to sell as much as 3.5 billion euros of a...
Monday, 28 November 2011 06:36 PM
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