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| Italy's prime minister Mario Monti. |
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 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 7.83 percent,
almost 50 basis points more than 10-year notes.
The euro extended declines, shedding 0.9 percent to
$1.3213, the lowest since Oct. 3. Italy’s FTSE MIB index was the
biggest decliner among European benchmarks, shedding 1.3 percent
at 3 p.m. in Rome. Banks tumbled with Banca Monte Paschi di
Siena SpA (BMPS) dropping 3.9 percent.
“The market action surrounding the Italian auction today
provides additional precursory indications that the European
government bond market is severely disrupted and it will likely
struggle to absorb the demanding pipeline of refinancing
European sovereigns need to secure,” said Silvio Peruzzo, an
economist at Royal Bank of Scotland Group Plc in London.
The sale came as Mario Monti, Italy’s new prime minister,
prepares 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.
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| Italy’s two-year bonds yielded a euro-era record 7.82 percent, almost 50 basis points more than 10-year notes |
‘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 the
highest since 1990 on Nov. 17 and Germany failed to sell 35
percent of 10-year bonds on offer at a Nov. 23 auction.
The recent developments “in euro-area sovereign bond
markets suggest that contagion is spreading from peripheral
countries to the so-called core countries,” European Union
Economic and Monetary Affairs Olli Rehn said in Rome today.
Contagion Risk
Bundesbank President and European Central Bank council
member Jens Weidmann played down the risk of contagion today in
an interview with Berliner Zeitung.
“Neither France nor Austria is wobbling, the interest rate
levels are not, by historical comparison, unusually high,”
Weidmann said, according to the newspaper. He also said German
bonds remain in demand and “one shouldn’t read too much into an
auction in which not all bonds were sold at low interest
rates,” Berliner reported.
The market rout comes in a week that saw two EU nations
have their credit rating cut to below investment grade. Fitch
Ratings lowered Portugal to junk yesterday. Moody’s Investors
Service followed by cutting Hungary to below investment grade.
European leaders agreed last month to try to leverage the
region’s bailout fund to boost its firepower to more than 1
trillion euros to help contain the crisis. That effort may be
compromised if contagion continues as the fund owes its AAA
credit rating to guarantees from the euro region’s six top-rated
nations. Should France lose its top rating, the fund’s lending
capacity would fall by 35 percent, Mizuho Corporate Bank Ltd.
analysts estimate.
Euro-Area Bonds
Monti met yesterday with German Chancellor Angela Merkel
and French President Nicolas Sarkozy in Strasbourg, France, to
outline his plans for tackling Italy debt and discuss joint
efforts to stem the crisis. Merkel reiterated her opposition to
pool European risk by issuing joint euro-area bonds and also
said the European Central Bank can’t be counted on as a borrower
of last resort.
The ECB has been buying Italian and Spanish debt since Aug.
8 in a bid to stem surging borrowing costs. Italian bonds fell
today even with the ECB purchasing the debt according to three
people with knowledge of the transactions. The yield on Italy’s
benchmark 10-year bond was 7.32 percent after the auction, up 22
basis points. Spain’s 10-year yield rose 10 basis points 6.72
within 10 basis points of a euro-era record.
End of Euro
Monti said that the two leaders agreed with his assessment
that Italy succumbing to the crisis could spell the end of the
euro.
Sarkozy and Merkel “confirmed their support for Italy,
saying that they are aware that the collapse of Italy would
inevitably lead to the end of the euro,” Monti told ministers
at a Cabinet meeting in Rome today, according to an e-mailed
statement. That “would provoke a stalemate in the process of
European integration with unpredictable consequences.”
Italy’ will test markets again next week when it seeks to
raise as much as 8.8 billion euros selling four different bonds,
including a 10-year, on Nov. 28 and Nov. 29.
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.
Debt Peaking
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.
Unlike Greece, Ireland and Portugal, Italy’s budget deficit
is under control and the country already has a primary surplus,
meaning that a debt of about 120 percent of gross domestic
product should start falling from next year. Italy’s outstanding
debt has an average maturity of more than seven years and more
than 75 percent of it is in longer-dated maturities, Gustavo
Bagattini, European economist at RBC Capital Markets in London,
wrote in a report on Nov. 17.
The “relatively long-term nature” of Italian debt “makes
it very resilient to interest-rate shocks in the short term,”
Bagattini said in a report published yesterday. “From a pure
fiscal sustainability point of view, the message is clear that
even 10-year borrowing costs of 8 percent, although undesirable,
would not send Italian debt spiraling out of control.”
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.
