Italy bond sale raises €10.7b as investor confidence grows

Rome: Strong demand for Italian government debt yesterday pushed the country's borrowing costs lower and suggested investors have become less jittery about a possible default by the Eurozone's third-largest economy.

Italy raised €10.7 billion in a pair of auctions at sharply lower rates than those it was forced to pay just a month ago when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.

The sharp decline in Italy's borrowing costs could be a signal that commercial banks from the 17 countries that use the euro diverted some of the money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments. It may also suggest rising investor confidence in Italy's recent efforts to reduce its long-term debt through a variety of austerity measures.

The Bank of Italy said the average yield on its €9 billion ($11.8 billion) six-month bill offering was 3.251 per cent, half the 6.504 per cent rate it had to pay at the equivalent auction last month. And an auction of two-year bonds, which raised €1.7 billion, also saw the yield fall to 4.853 per cent from 7.814 per cent last month.

In the wake of the auction results, Italy's benchmark ten-year bond yield in the markets consolidated below the seven per cent level, which is widely considered to be unsustainable in the long-run.

"This is an encouraging development, suggesting that the Italian sovereign debt market has pulled back from the dangerous situation in late November," said Raj Badiani, a senior economist at IHS Global Insight.

"The calmer environment reflects the passing of additional austerity measures and some welcome progress on the structural reform agenda, coupled with the ECB's decision to provide additional cheap financing to Italian banks," Badiani added.

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.

As well as possibly indicating increased confidence that Monti's efforts will keep the country's finances on a sustainable path, yesterday's auctions could also have been supported as well by a large infusion of credit to Eurozone banks last week from the ECB.

A week ago, 523 banks took the opportunity to swell their coffers by €489 billion, the largest ECB loan operation in the 13-year history of the euro.

There has been speculation that the stronger banks might use the cheap, long-term loans — on which the current interest rate is one per cent.

Further test today

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. Next year alone, Italy has around €330 billion of debt to refinance.

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