Italy Sells EU7 Billion in Bills as Costs Decline

By Jeffrey Donovan - Dec 12, 2011 5:14 PM GMT+0700

Italy sold 7 billion euros ($9.3 billion) of one-year bills, the maximum for the auction, and borrowing costs declined after Prime Minister Mario Monti’s government approved a 30 billion-euro emergency economic plan.

The Rome-based Treasury sold the bills to yield 5.952 percent, down from 6.087 percent at the last auction on Nov. 10, which was the highest in 14 years. Demand was 1.92 times the amount on offer, compared with 1.99 times last month.

Italy’s borrowing costs surged at the previous auction after former Prime Minister Silvio Berlusconi offered to resign and LCH Clearnet SA demanded more collateral on the country’s debt. The yield on the nation’s 10-year bond yield closed five times last month above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts.

The yield on the benchmark bond was 6.57 percent after the auction at 11:07 a.m. in Rome. That pushed the difference with German bonds to 4.5 percentage points, up from 4.21 percentage points on Dec. 9. Italy’s next market test is Dec. 14, when it auctions as much as 3 billion euros of five-year bonds.

Monti’s Cabinet approved a sweeping budget plan on Dec. 4 aimed at raising revenue and boosting Italy’s anemic growth to persuade investors Italy can tame the region’s second-biggest debt and avoid a bailout. Parliament is due to vote on the plan by Christmas and Monti has warned that the failure to approve it could lead to Italy’s “collapse” and threaten the survival of the single currency.

Initial Backing

Investors initially gave their backing to the plan, with Italian bonds gaining the most in almost four months and the yield difference with German bunds falling below 400 basis points for the first time since Oct. 31. Yields rose again last week after European leaders failed to come up with a definitive solution to end the sovereign-debt crisis at a Dec. 8-9 summit in Brussels.

Moody’s Investors Service said today that it will review the ratings of all European Union countries in the first quarter because the summit failed to produce “decisive policy measures” to end the crisis. At the summit, euro-region leaders agreed to a fiscal accord to create more oversight of budget policies and automatic penalties for countries violating deficit rules.

Negative Outlook

The move by Moody’s came after Standard & Poor’s last week put the EU’s AAA long-term rating on “creditwatch negative” and placed 15 euro-area countries including AAA rated France and Germany on a negative outlook. S&P said on Dec. 9 that it would study the summit’s outlook before deciding whether to proceed with the ratings cut.

Italy’s debt of 1.9 trillion euros is more than that of Spain, Greece, Portugal and Ireland combined. Its jump in bond yields is already raising borrowing costs for a country that faces 200 billion euros of bond redemptions in 2012. Italy’s Treasury had to offer a yield of 6.29 percent, the highest since 1997, on five-year debt at an auction on Nov. 14.

Italy will be able to withstand an increase in borrowing costs for at least a few years because its relatively long debt maturity helps offset the effects of higher bond yields, the Bank for International Settlements said in its Quarterly Report.

The cost of servicing its debt would rise by just 0.95 percent of gross domestic product next year if 10-year yields stayed at the record 7.48 percent reached last month, the BIS said, citing its own calculations. The “worst-case scenario” would have to persist for three years for the additional costs to exceed 2 percent of output, the bank said.

To contact the reporter on this story: Jeffrey Donovan at jdonovan26@bloomberg.net

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