Monti buoyed by ace bond sessions

2012-01-29 15:19

Milan - Shored up in the polls and with a run of successful bond sessions in the bag, Italian Prime Minister Mario Monti's government is staying the course on bitter reforms despite countrywide strikes.

Monti, who took over when former premier Silvio Berlusconi was ousted amid intense market pressure, adopted new measures aimed at simplifying bureaucracy on Friday, as part of his Grow Italy plan designed to boost growth.

Amid fears that the heavily-indebted eurozone country was sliding towards bankruptcy, Monti pushed through an austerity package in December and a liberalisation plan last week - much to the fury of trade unions and guilds.

Investors appear reassured by his decisive governance and Rome celebrated its fourth successful bond session since the beginning of the year on Friday.

The Treasury sold €11bn in short term bonds at sharply lower rates, after receiving bids for more than €16bn.

The rate of return paid to investors on six-month bills fell to 1.969% from 3.251% in the previous auction, while the rate on flexible bonds dropped to 2.214% from 2.735%.

Analysts said short term bonds were being supported by liquidity injected in December by the European Central Bank (ECB), which offered vast loans to eurozone banks, particularly benefiting Italy's financial institutions.

Friday's session - following Rome's successful issue of €5.0bn in medium-term bonds on Thursday at much lower interest rates - is a sign that market pressure could be easing on the heavily-indebted eurozone country.

There had been "important purchases from foreign investors" and the session showed "a real step towards normalisation," said Sergio Capaldi, a bond strategist at Intesa Sanpaolo bank.

Italy's borrowing costs have dropped to around 6.0% for 10-year bonds, from an alarming 7.0% at the end of 2011.

However, Capaldi warned the market "may be overly positive". While Monti may have "clawed back a bit of confidence abroad," his political future is still uncertain and "it is still too soon to say that rates will not rise again."

While Monti's popularity appears to only have dipped slightly from 58% in December to 56% this month despite the cuts and tax hikes according to an IPR poll, country-wide strikes may still take their toll.

A truck drivers' strike against a tax hike on petrol caused major disruption to petrol and food distribution across Italy, while taxi drivers revolted over liberalisations which also affect pharmacies, notaries and insurance companies.

Petrol station attendants and lawyers are among others set to strike in the coming weeks as the protests continue and fears over social degradation rise.

"The markets appear to trust that Monti's government will see out its term in 2013, but there may be some surprises on that front," Capaldi said.

The country, which has probably fallen into recession, faces another market test on Monday, when it hopes to raise €5.5bn to €8.0bn in medium to long-term bonds.

Rome is struggling with a colossal debt of €1.9 trillion, around 120% of the country's gross domestic product, and has said it will issue bonds worth almost €450bn this year.

Despite signs investors are regaining confidence in Italy, Berlusconi's former coalition partner Umberto Bossi has been trying to rustle up support to bring down Monti, whom he said "the whole country wants to throttle."

But the Northern League leader has not yet been able to persuade the playboy former premier to do the dirty on his successor.

"Silvio Berlusconi is not interested in pulling the plug on the Monti government at the moment," said Stefano Folli from Il Sole 24 financial daily.

"It's nothing to do with generosity of spirit. It's a calculated move: if the 'technocrats' have to fall, it has to be because of discrepancies in the left, not spasms in the right," he said.