(italian premier mario monti…)
Italy’s borrowing rates fall for 2nd day running
Thursday, December 29, 2011
Italy saw its borrowing rates fall for the second day running as it raised around euro7 billion ($9.2 billion) in a range of auctions Thursday, a further sign that concerns over a default have eased a bit over the past month.
The Bank of Italy said Italy raised euro2.5 billion ($3.3 billion) of ten-year bonds at an average yield of 6.98 percent. That’s lower than the 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.
However, the country’s borrowing rate on the key 10-year bond remains uncomfortably close to the 7 percent level widely considered to be unsustainable in the long run. Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 percent.
In the secondary markets, it continues to hover around the 7 percent mark.
Markets had grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around euro1.9 trillion ($2.5 trillion). Next year alone, Italy has some euro330 billion ($431 billion) of debt to refinance.
Italy, which is the eurozone’s third-largest economy, also sold euro2.54 billion of 3 year bonds at an average interest rate of 5.62 percent, far lower than the 7.89 percent rate it had to pay last month. It also raised euro803 million in the 7-year auction at a rate of 7.42 percent and euro1.18 billion in nine-year bonds at a yield of 6.7 percent.
Thursday’s results come a day after Italy raised euro10.7 billion in a pair of auctions, again at sharply lower rates than those it was forced to pay just a month ago.
The sharp decline in Italy’s borrowing costs over the past couple of days suggests that commercial banks from the 17 countries that use the euro may have diverted some money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments.
It may also suggest rising investor confidence in Italy’s recent efforts to reduce its long-term debt through a variety of austerity measures.
Mario Monti, Italy’s new premier, is holding a press conference Thursday and the state of the economy is likely to feature large.
Monti’s technocratic government got parliamentary approval last week for more spending cuts and tax increases intended to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of Italy’s bloated pension system.
Eurozone faces tough hurdles early in 2012
By DAVID McHUGH Dec 29, 8:15 AM (ET)
FRANKFURT, Germany (AP) – After a turbulent 2011, the 17 countries that use the euro will be quickly confronted in the new year with major hurdles to solving their government debt crisis, just as the eurozone economy is expected to sink back into recession.
With government finances under pressure as growth wanes, the eurozone will find it even more difficult to shore up shaky banks and reduce the high borrowing costs that threaten Italy and Spain with financial ruin.
As early as the second full week of January, bond auctions in which Italy and Spain need to borrow big chunks of cash will start showing whether the eurozone is finally getting a grip on the 2-year-old crisis that has seen Greece, Ireland and Portugal bailed out.
If the auctions go well and borrowing costs ease, the crisis will ease, lending support for the EU strategy of getting governments to embark on often-savage austerity measures to reduce deficits, along with massive support for the banking system from the European Central Bank.
High rates, on the other hand, would feed fears of a government debt default that could cripple banks, sink the economy and, in the extreme case, destroy the 17-member currency union.
Key events early in the New Year:
- Italy and Spain will seek to borrow heavily in the first quarter at affordable interest costs, starting the second week in January.
- The slowing eurozone economy may slip into or already be in recession, lowering tax revenue and increasing government budget deficits.
- Bailed-out Greece must agree with creditors on a debt writedown that will cut the value of their holdings by 50 percent in an effort to start putting the bankrupt country back on its feet.
The task is for the major players – eurozone governments, the European Union’s executive Commission and the European Central Bank – to convince financial markets that troubled governments can pay their heavy debts and therefore deserve to borrow at affordable interest costs.
Default fears have driven up bond market interest rates and made it more and more expensive for indebted governments to borrow to pay off maturing bonds. That vicious cycle forced Greece, Ireland and Portugal to seek bailout loans from the other eurozone governments and the International Monetary Fund.
A key stress point will be whether Italy can continue to raise money in the markets at affordable rates.
In the first quarter, it has to step up its borrowing to pay off euro72 billion ($94 billion) in bond redemptions and interest payments. Spain, which is expected to sell up to euro25 billion ($33 billion) in new debt, starts a heavy period of auctions on Jan. 12, and Italy begins on Jan. 13.
Overall, Italy has more than euro300 billion ($392 billion) in debt maturing in 2012.
“If Italy manages to auction this debt successfully, then the debt crisis will take a step back from the cliff edge,” said analyst Jane Foley at Rabobank. “If it doesn’t, it could go over the cliff edge. At the end of the day, whatever the nuances and hours of discussion that have gone on about the sovereign debt crisis, it boils down to whether a sovereign can sell its debt in the open market.”
If Italy fails to borrow at affordable rates, the options are few and unattractive. The eurozone’s euro500 billion ($653 billion) in bailout funds – already partly committed to earlier bailouts – would struggle to cover Italy’s financing needs, even if additional help can be found from the IMF. A bigger solution – commonly guaranteed eurobonds – faces German resistance and would take time to implement.
The European Central Bank could use its power to buy large amounts of Italian and Spanish bonds with newly created money – but has so far refused, out of concern that a central bank bailout would remove the incentive for governments to control their spending.
Instead, the bank has focused on pushing credit to banks so they can keep lending to support the economy.
Still, its limited bond purchases have provided essential support to Spain and Italy by helping hold down borrowing costs. And its latest massive infusion of euro489 billion ($639 billion) in cheap, long term loans may help troubled governments borrow, as stronger banks may use some of the money to buy higher-yielding government bonds.
Italy pays an average of about 4.2 percent on its existing stock of euro1.9 trillion in debt, but the crisis has pushed bond yields on the country’s benchmark ten-year bonds to over 7 percent.
Italy’s new government, led by economist Mario Monti, can probably pay rates that high for a while, analysts think. Italy paid much higher interest rates in the 1990s for several years; rates peaked at 14 percent in 1992 but fell gradually to around 4 percent by 1998 as the country shaped up its finances to join the euro at the beginning of 1999.
Italy and Spain’s battle will be even harder if the debt troubles pull the whole eurozone into a recession. Economists at Ernst & Young foresee a mild recession in the first part of the year and only 0.1 percent growth for the year as a whole, with unemployment at 10 percent for several years.
That will make it harder for governments to persuade voters to accept more cutbacks in spending, pensions and government wages while raising taxes.
It’s not clear how long voters in Greece, which will have its fourth straight year of recession next year, will tolerate continuous austerity. Yet the cutbacks are the price of getting the bailout loans that have kept Greece from default.
Meanwhile Greece is striving to get creditors to agree to write down some debt and avoid larger losses in case of a default that is not agreed ahead of time. A euro14.4 billion ($18.8 billion) chunk of debt comes due in March.
Guntram Wolff, deputy director of the Bruegel think tank in Brussels, said that governments may get past the early hurdles – only to confront a souring mood among voters in the second half of the year over continuing cutbacks and sacrifices. New governments in Spain and Italy, currently enjoying political honeymoons, will be pressed to show progress. Greece, with a transitional government and elections expected in April, has seen repeated protests and strikes.
“There will be a point in the summer when people have seen a lot of action from government and no improvement in their living conditions and they will ask, do we have this euro to live with austerity and high unemployment,” he said.
Wolff thinks that the determination of political elites to keep the euro together will win out: “I think it’s going to survive.”