Italy Borrowing Costs Almost Double as Euro Tumbles

By Andrew Davis and Jeffrey Donovan - Nov 25, 2011 7:32 PM GMT+0700

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The euro fell to a seven-week low.

The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the six-month debt, almost twice the 3.535 percent a month ago and the highest since August 1997. Italy’s two-year bonds yielded a euro-era record 7.82 percent, almost 50 basis points more than 10-year notes.

The euro extended declines, shedding 0.9 percent to $1.3231, the lowest since Oct. 3. European stocks declined for a seventh day, the longest losing streak since August, with the Stoxx Europe 600 dropping 0.6 percent to 218.61. Italian banks tumbled with Banca Monte Paschi di Siena SpA (BMPS) losing 5.1 percent.

The sale came as Italy’s new prime minister, Mario Monti, met his Cabinet to advance additional budget measures that aim to cut a debt of 1.9 trillion euros and boost the economy in a country where growth has lagged the euro-region average for more than a decade. Spain is also facing surging costs. The Treasury in Madrid paid 5.11 percent on three-month notes this week, more than twice that previous sale and higher than Greece pays.

‘Damaging Concessions’

“For all the periphery issuers, each auction brings such damaging concessions,” Luca Jellinek, head of European interest- rate strategy at Credit Agricole Corporate & Investment Bank in London, wrote in an e-mail. “Monti and his new Cabinet better engage a faster gear but the periphery and Italy in particular face a very long, very hard road.”

Two years into the region’s debt crisis, European leaders are struggling to stop its spread and prevent contagion from affecting core countries such as France and Germany. The yield difference between French and German 10-year bonds reached an 11-year high on Nov. 17 and Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 auction

Monti joined German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday at a meeting in Strasbourg, France in calling for greater European fiscal coordination. Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

The ECB has been buying Italian and Spanish debt since Aug. 8 in a bid to stem surging borrowing costs. The yield on Italy’s benchmark 10-year bond was 7.3 percent after the auction, up 19 basis points. Spain’s 10-year yield rose 6 basis points 6.689 within 10 basis points of a euro-era record.

The soaring borrowing costs won’t have a lasting impact on Italy’s debt even as the Treasury prepares to sell 440 billion euros of bonds and bills next year, Maria Cannata, director of public debt at the Treasury, said on Nov. 16.

The amount “sounds prohibitive, but it’s not, even if things have gotten more complicated as investors are frightened by the volatility,” Cannata said at a conference in Milan. Italy’s first bond redemption comes on Feb. 1, when it must pay back 26 billion euros for debt sold 10 years ago.

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net; Jeffrey Donovan in Prague at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.