By Lorenzo Totaro - Nov 29, 2011 7:14 PM GMT+0700
Nov. 29 (Bloomberg) -- Robin Marshall, director of fixed income at Smith & Williamson Investment Management, talks about today's Italian bond auction which saw the debt-laden nation paying above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts. Marshall speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Nov. 29 (Bloomberg) -- Bob Parker, senior adviser at Credit Suisse Asset Management, talks about investing in emerging debt and the euro-zone sovereign crisis. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Nov. 29 (Bloomberg) -- Steen Jakobsen, chief economist at Saxo Bank A/S, talks about efforts to resolve the European sovereign-debt crisis. He speaks from Hellerup, Denmark, with Owen Thomas and Linda Yueh on Bloomberg Television's "Countdown." (Source: Bloomberg)
Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts when it sold 7.5 billion euros ($10.1 billion) in bonds today, short of the maximum target for the auction.
The Rome-based Treasury sold 3.5 billion euros of a new three-year bond, 2.5 billion euros of 2022 bonds and 1.5 billion euros in 2020 bonds, just shy of the top range of 8 billion euros for the sale. The 2014 note yielded 7.89 percent, the highest since September 1996 for a three-year bond and up from 4.93 percent when similar-maturity debt was sold last month.
“Italy is paying a considerable premium for its debt and today’s auction confirmed the recent trend,” Annalisa Piazza, an economist at Newedge Group in London, said in a note. “If we want to look at the ‘bright’ side, the Italian Treasury managed to allocate a big size of its debt today.”
The surge in Italian yields to near euro-era records, even as the European Central Bank backstops the nation’s bonds, is fueling investor concern about the sustainability of a debt load bigger than Spain, Greece, Ireland and Portugal combined. The Italian auction came as euro-region finance chiefs gather in Brussels to try to advance their latest plan for ending the two- year-old debt crisis.
Bond Yields
Italy’s 10-year benchmark bond pared gains after the auction, the yield climbing 10 basis points to 7.36 percent at 12:50 p.m. Rome time. The yield difference with German bunds widened to 505 basis points, and Italy’s two-year note yield rose 4 basis points to 7.14 percent. The euro was at $1.3383 compared with $1.3320 yesterday.
The Treasury sold the 2022 bond to yield 7.56 percent, up from 6.06 percent when the security was last sold Oct. 28, and auctioned the 2020 bond at 7.28 percent, up from 5.47 percent the last time it was sold on Sept. 13. Demand for the 2014 bond was 1.5 times the amount sold, while the bid-to-cover for the 2022 bond was 1.34 times. That compared respectively with 1.35 times and 1.27 times at the Oct. 28 auction. Today marked the third auction in a week when Italy paid pay more than 7 percent.
“These are hopelessly unsustainable yields and reflect the panic that is enveloping the euro zone,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed note.
Competing Auctions
Italy this week was competing with debt sales in Belgium, France and Spain of as much as 10 billion euros. Belgium sold 1.02 billion euros of three-month and six-month treasury bills, less than initially planned even as demand rose. The nation paid 2.438 percent for the 6-month debt, the highest in three years. Both France and Spain sell bonds on Dec. 1.
Finance ministers from the 17-member euro region meet today in Brussels to thrash out details on how to boost the financial muscle of its bailout fund before an EU summit on Dec. 9 and stop contagion to the EU’s core. Government bond yields for both Germany and France, Europe’s two largest economies, climbed last week as a German bond auction failed to get bids for 35 percent of the 10-year debt on offer.
“It looks like contagion is spreading to core countries” in Europe, Union Economic and Monetary Affairs Commissioner Olli Rehn said on Nov. 25.
Monti’s Moves
Italian Prime Minister Mario Monti is planning to announce measures to cut the 1.9 trillion-euro debt before he attends his first EU summit since becoming sworn in on Nov. 16. Italy’s new government may reinstate property taxes, overhaul the tax system and pension rules, and modify labor laws, Monti, who is also finance minister, told Parliament in Rome earlier this month.
The jump in Italian yields has come even with the ECB trying to shore up demand for the nation’s debt. The ECB started buying Spanish and Italian debt on Aug. 8 to try to tame borrowing costs after the 10-year yield had surged to euro-era record of 6.4 percent. After falling to under 5 percent around mid-August, the Italian 10-year yield resumed rising and reached a new record of 7.48 percent on Nov. 9.
Italy’s relatively low budget deficit and a primary surplus mean the country can sustain the higher borrowing costs for some time, the Bank of Italy said on Nov. 2. Even if yields on “all new issues of government securities” started to increase on Jan. 1 by 2.5 percentage points, debt would still decline to 115.5 percent of GDP in 2014. Should economic growth also come to a standstill in the next three years, debt would “stabilize at just over 120 percent of GDP,” the central bank said.
Debt Restructuring
New York University economist Nouriel Roubini wrote in the Financial Times today that Italy will be forced to restructure its debt to avoid a default, because the country won’t be able to generate a big enough primary surplus for the government to meet its debt-reduction targets.
The International Monetary Fund denied yesterday a report in Italy’s La Stampa newspaper saying it’s discussing a rescue plan of as much as 600 billion euros to support Italian efforts to restore investor confidence.
Italy, whose economic growth has trailed the euro-region average for more than a decade, may contract 0.5 percent next year, the Organization for Economic Cooperation and Development said yesterday in its semi-annual outlook. The OECD called for Monti to take decisive action” to meet the target of a balanced budget in 2013.
Moody’s Investors Service said in a report yesterday that the probability of multiple defaults by euro-area countries is no longer negligible.
To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.
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