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Italy's borrowing costs fall but market upheaval not over yet
Source: Agencies |
December 30, 2011, Friday
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ITALY'S borrowing costs fell for a second day yesterday but the country's new premier said his government has more to do before it convinces financial markets it can manage the heavy debts that have made it the focus of the eurozone crisis.
Mario Monti said he was encouraged by bond auctions at which interest costs demanded by bond investors eased. He said his government of technocrats, in office for just a month and a half following the resignation of Silvio Berlusconi, was preparing a package of measures to get the Italian economy moving again, including efforts to boost competition and liberalize the labor market.
"We absolutely don't consider the market turbulence to be over," he said at a news conference after the Italian treasury tapped investors for around 7 billion euros (US$9.2 billion).
The most keenly awaited result from yesterday's auctions was the 2.5 billion euro sale of 10-year bonds at an average yield of 6.98 percent.
That's lower than the record 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute.
However, the country's borrowing rate on the key 10-year bond remains uncomfortably close to the 7 percent level widely considered to be unsustainable in the long run. Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 percent. In the secondary markets, Italy's yield continues to hover around 7 percent.
The 17 countries that use the euro are struggling with a crisis over heavy levels of government debt in several countries. Fears of default on those debts mean that bond investors demand ever higher interest. If a country can no longer borrow affordably to pay off bonds that are maturing, it winds up needing a bailout or defaulting.
Markets had grown fearful over the past few months over Italy's massive debt burden of 1.9 trillion euros. That means Italy has far to go before it convinces markets it will avoid a disastrous default that could cause another banking crisis and sink the European and global economies.
Italy also sold 2.54 billion euros of three-year bonds at an average interest rate of 5.62 percent, far lower than the 7.89 percent rate it had to pay last month. It also raised 803 million euros in the seven-year auction at a rate of 7.42 percent and 1.18 billion euros in nine-year bonds at a yield of 6.7 percent.
Yesterday's results come a day after Italy raised 10.7 billion euros in a pair of auctions, again at sharply lower rates than those it was forced to pay just a month ago.
The sharp decline in Italy's borrowing costs over the past couple of days suggests that commercial banks from the 17 countries that use the euro may have diverted some 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 cut its long-term debt via tax increases, pension changes and spending cuts.
Monti's government got parliamentary approval last week for more spending cuts and tax rises to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of its bloated pension system.
Mario Monti said he was encouraged by bond auctions at which interest costs demanded by bond investors eased. He said his government of technocrats, in office for just a month and a half following the resignation of Silvio Berlusconi, was preparing a package of measures to get the Italian economy moving again, including efforts to boost competition and liberalize the labor market.
"We absolutely don't consider the market turbulence to be over," he said at a news conference after the Italian treasury tapped investors for around 7 billion euros (US$9.2 billion).
The most keenly awaited result from yesterday's auctions was the 2.5 billion euro sale of 10-year bonds at an average yield of 6.98 percent.
That's lower than the record 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute.
However, the country's borrowing rate on the key 10-year bond remains uncomfortably close to the 7 percent level widely considered to be unsustainable in the long run. Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 percent. In the secondary markets, Italy's yield continues to hover around 7 percent.
The 17 countries that use the euro are struggling with a crisis over heavy levels of government debt in several countries. Fears of default on those debts mean that bond investors demand ever higher interest. If a country can no longer borrow affordably to pay off bonds that are maturing, it winds up needing a bailout or defaulting.
Markets had grown fearful over the past few months over Italy's massive debt burden of 1.9 trillion euros. That means Italy has far to go before it convinces markets it will avoid a disastrous default that could cause another banking crisis and sink the European and global economies.
Italy also sold 2.54 billion euros of three-year bonds at an average interest rate of 5.62 percent, far lower than the 7.89 percent rate it had to pay last month. It also raised 803 million euros in the seven-year auction at a rate of 7.42 percent and 1.18 billion euros in nine-year bonds at a yield of 6.7 percent.
Yesterday's results come a day after Italy raised 10.7 billion euros in a pair of auctions, again at sharply lower rates than those it was forced to pay just a month ago.
The sharp decline in Italy's borrowing costs over the past couple of days suggests that commercial banks from the 17 countries that use the euro may have diverted some 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 cut its long-term debt via tax increases, pension changes and spending cuts.
Monti's government got parliamentary approval last week for more spending cuts and tax rises to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of its bloated pension system.
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