Bond yields rise above 8pc on short-term Italian debt
Rome forced to pay record rates on six-month borrowings as leaders fail to make progress on resolving euro crisis
Published 26/11/2011 | 05:00
BOND yields on short-term Italian debt rose above 8pc after Rome was forced to pay euro-era high interest rates in what analysts called an another "awful" auction. Earlier in the day, Italy paid a record 6.5pc to borrow six-month money -- almost double compared to a month earlier.
This capped a week in which a German bond auction failed and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.
A peak of 8.13pc was reached on Italian three-year bonds, as the country's debt traded deeper into territory associated with bailouts of Greece, Portugal and Ireland in the past 18 months.
Though Italy managed to raise the full planned amount of €10bn, weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market.
In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7pc threshold, over which Italy is likely to need outside help if they do not subside.
"The pricing is awful," said Padhraic Garvey, rate strategist with Dutch bank ING in Amsterdam. "The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."
Investors' attention will now turn to a bond sale of up to €8bn that Italy is planning for next Tuesday.
"For the BTP auctions next week, we'll have more of the same. They'll probably get it done at a concession," Mr Garvey said.
Italy's new technocrat government, which took power last week, is at work on structural reforms to revive the stagnant economy, but markets are looking for quick and effective responses from European policymakers, such as a greater involvement of the ECB.
Traders said the ECB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its reluctance to prop up high-debt eurozone governments, its bond-buying programme has been conducted intermittently, and never powerfully enough to provide more than short-term stability.
New Bank of Italy Governor Ignazio Visco said short-term measures to tame Italy's budget deficit would not be enough to solve the country's economic problems and only structural reforms will generate growth.
At an annual average rate of just 0.3pc over the past decade, the Italian economy has grown faster than only a handful of other countries across the world. Real purchasing power has fallen 4pc in 10 years.
Since being thrust to the fore of the eurozone crisis in July, Italy has always managed to attract sufficient demand at its auctions.
But record high yields threaten Rome's planned gross issuance of €440bn for 2012 as interest payments on the country's €1.9tr debt pile rise.
Analysts say that, at current yield levels, the eurozone's third-largest economy risks losing market access as redemptions totalling a massive €150bn for the February-April period approach.
The euro, already trading around a seven-week low, inched down after Friday's auction. European stock markets remained in negative territory for the day with the Milan stock-market the worst performer.