D-day for crucial Italian bond auction

2011-12-29 08:17

Rome - Italy faces a key bond auction test on Thursday at the end of a year in which the eurozone plunged into an unprecedented financial crisis that has threatened the very existence of the single currency.

The eurozone's third-largest economy, Italy, is planning to raise up to €8.0bn in bonds due in three, seven and 10 years in a sale that is being closely watched by the international financial markets.

The bond sale expected at around 10:00 GMT will come after the release of a business confidence index for December - a month in which the retail sector has struggled due to a plunge in Christmas consumption compared to last year.

Prime Minister Mario Monti will give a press conference at 11:00 GMT.

The Treasury on Wednesday raised €9.0bn in six-month bonds at a rate of 3.251% - half the rate of 6.504% 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 (ECB) money were largely behind the auction's success, along with a tough austerity plan to right Italy's struggling public finances adopted earlier this month.

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 after Greece, Ireland and Portugal.

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.

Italy took its first step into recession with an economic shrinkage of 0.2% of output in the third quarter and the government is forecasting a contraction of 0.4% in 2012, adding pressure for pro-growth reforms.

Italy spooked the financial markets this year with its painfully low growth and a sharp rise in borrowing costs, raising fears of an imminent blow-up of its giant debt - equivalent to 120% of gross domestic product.

Silvio Berlusconi's replacement by Monti as prime minister in November has helped calm nerves, although there is still concern about the impact on the economy of his draconian plan which includes tax increases and pension reforms.

The rate on 10-year bonds has hit well above 7.0% this year - far higher than a level seen as sustainable - and the ECB has been forced to intervene with massive bond purchases on the secondary market.

Analysts suggested the ECB may also have had a role in Wednesday's dramatic drop in Italian bond rates as last week it provided banks with a record €489.2bn in three-year loans at an interest rate of just 1.0%.

While the injection was made 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.

Gregorio De Felice, chief economist at Intesa Sanpaolo bank, was quoted by La Repubblica daily as saying: "The success was determined, especially on the institutional investor front, by the European Central Bank auction.

"Investors still need to gain some confidence on the long term," he said.

MoneyCorp analyst Mark Deans said: "While Italy managed to have a successful auction of short-term six-month debt, market jitters are still there in regards to the 10-year debt on offer by Italy in tomorrow's trading session."

Italy will have to raise some €450bn on the debt markets in 2012 - with around €53bn to be raised next month - and analysts say it will struggle if the relatively high rates seen recently persist.