Italian long term cost of borrowing stays high

Neville Hill: "The most important thing is they are finding buyers for their debt"

Italy's long-term cost of borrowing has remained high as worries about the eurozone debt crisis continue.

The Italian government raised around 7bn euros ($8.96bn, £5.86bn) of medium and long-term debt on Thursday.

The interest rate on Italian 10-year bonds was 6.98%, viewed as unsustainably high by investors.

Italy has 161bn euros in debt repayments due between February and April, all of which it will have to finance through new borrowing.

Following the auction the euro fell to its lowest level against the dollar for 15 months, at $1.287, ending at $1.29 on Thursday.

European markets closed up on Thursday despite the concerns over Italy's financial future.

The FTSE-100 ended 1.08% up, while the Paris CAC rose 1.84% and the German Dax edged up 1.34% at the close.

Interest payments

The interest rate on Italy's ten-year debt was just over 0.5 percentage points lower than the 7.56% it had to pay at its last auction of 10-year bonds on 30 November.

Economists had hoped for a larger fall to make Italy's interest repayments more sustainable.

"The rate is still quite high but the most important thing is they are finding buyers for their debt," said Neville Hill, European economist at Credit Suisse.

Start Quote

Auctions held yesterday and today went rather well”

End Quote Mario Monti Italian Prime Minister

Italy's short and medium-term cost of borrowing fell significantly.

The government paid 5.62% on new three-year debt, down from the 7.89% paid a month ago.

On Wednesday, the country raised 9bn euros ($11.8bn, £7.56bn) of very short-term debt at far lower borrowing costs.

ECB intervention

In a press conference Italy's new Prime Minister, Mario Monti, said he was "relieved" by the auctions.

"Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn't over," said the former economist and EU commissioner.

The auctions were the first since the European Central Bank provided European lenders with 489bn euros of its new three-year loans just before Christmas.

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Just over half of the money was used to service banks' existing debts leaving lenders with around 190bn euros in spare cash to invest elsewhere, possibly including government bonds.

The injection of money into the banking system may have reduced Italy's short-term borrowing costs.

Mixed news

The latest auction came on a day of mixed economic news for the single currency bloc.

  • The euro fell sharply against most major currencies, reaching 100.35 against the yen, its lowest level since July 2001 and a 15-month low against the dollar
  • Spain's central bank has said that its economy shrank in the final 3 months of 2011 based on incomplete economic data
  • Italian business confidence in December fell, according to official data from Istat. Confidence fell most sharply in the construction and retail sectors

Markets were affected by the news that European banks had deposited record amounts overnight with the European Central Bank, raising fears of a credit crunch.

One interpretation of this increased usage of the ECB's deposit facility is that it reflects nervousness among Europe's banks about lending the money to each other due to the economic uncertainty.

"It could be a sign of market tension," said James Ashley a senior economist at the Royal Bank of Canada.

"But there are a number of other interpretations. We don't know which banks are depositing and in which size."

Some suggest, instead, that the increased use of the facility is simply a response to the recent intervention by the ECB.

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