Italy scraped through a key bond auction test on Thursday but Prime Minister Mario Monti called for a European-wide response to the debt crisis that has pushed the eurozone to the brink.
The Treasury raised €7-billion — below the maximum sought of €8.5-billion but with long-term rates holding below the danger threshold of 7% which has set off alarm bells around the world.
The rate on bonds due in 2021 was at 6.7% — higher than the level of 5.77% for the last similar operation on October 13. The rate on bonds due in 2022, however, was 6.98% compared to 7.56% in November.
Short-term rates had fallen sharply in another auction on Wednesday.
This week’s auctions “went rather well and this is encouraging but we certainly do not think that the phase of financial turbulence is finished,” Monti told reporters at an end-of-year press conference.
Monti also stressed that problems for Italy on the markets were linked to wider difficulties on the European level which required a “united, joint and convincing response” that could also boost growth.
Italy’s ability to borrow on the market was being closely watched as a test of confidence in the eurozone after the single currency fell to near one-year lows against the dollar and the 10-year lows against yen in an indication of investor fears.
‘Over the moon’
“The bond auction went okay, given what is going on in the eurozone, but almost 7% for 10-year paper is very high,” ETX Capital trader Manoj Ladwa said.
Rene Defossez, a bond strategist at French investment bank Natixis: “There’s no reason to be over the moon. We’re basically at 7%.
“We have to remember that next year there is a big, big programme and the conditions for raising it are not necessarily very good,” he said.
Italy will have to raise €450-billion on the debt markets in 2012 — with around €53-billion to be raised next month — and analysts say it will struggle if the high rates seen recently persist.
The eurozone’s third largest economy, Italy sparked fears this year that its toxic mix of low growth, high debt and spiralling borrowing costs could force it to seek a bailout like fellow eurozone members Greece, Ireland and Portugal.
Silvio Berlusconi’s replacement by Monti as prime minister last month has helped ease fears of an imminent debt implosion as the former European Union commissioner quickly put in place a tough plan of austerity measures.
But there is still concern over the plan’s impact on an economy that is moving into recession after shrinking by 0.2% in the third quarter.
The government is forecasting a contraction of 0.4% next year.
Business confidence
There was more bad news on the economic front meanwhile with a closely watched business confidence index falling to 92.5 points in December.
Confidence fell partly steeply for the construction and retail sectors after a Christmas season in which consumption was down compared to last year.
Italy on Wednesday raised €9-billion in six-month bonds at a rate of 3.251% — half the rate of 6.504% that it was forced to pay in November and below the level of 3.535% it paid in October.
Analysts suggested that banks making use of low-cost European Central Bank money were largely behind the auction’s success, along with the austerity measures adopted this month and aimed at restoring budget balance by 2013.
The ECB last week provided banks with a record €489.2-billion in three-year loans at an interest rate of just 1%.
While the injection was made in order to avoid a credit crunch, the low rate makes it easy for banks to make money off higher-yielding bonds and analysts have been anticipating the funds may help lower government borrowing costs.
Borrowing costs have spiked to record highs across the 17-nation eurozone in the past few months over fears that economies like Italy could be forced to seek giant international bailouts that would bankrupt Europe.
European leaders have agreed to strengthen rules and sanctions for keeping public accounts in order but there are lingering doubts about the deal and about the impact of an expected slowdown in eurozone growth in 2012. — AFP