Business World

Monday 21 August 2017

Monti seeks bigger euro fund after tough 10-year bond sale

Yield of 7pc on Italian debt shows markets are not convinced euro crisis is over

Italian Prime Minister Mario Monti holds up a graph charting the widening spread trend over the last year between the
German and Italian 10-year benchmark bonds during his year-end news conference in Rome yesterday. Photo: Rueters
Italian Prime Minister Mario Monti holds up a graph charting the widening spread trend over the last year between the German and Italian 10-year benchmark bonds during his year-end news conference in Rome yesterday. Photo: Rueters
John Mulligan

John Mulligan

SIGNIFICANTLY more money needs to be injected into a European rescue fund to tackle the region's continuing debt crisis, according to Italian Prime Minister Mario Monti.

He was speaking as Italy auctioned €7bn worth of bonds yesterday, falling short of its €8.5bn target.

Italy has raised €20bn so far this week, but its 10-year borrowing costs remain stubbornly high and triple that of Germany. The yield on Italian 10-year bonds was 7.01pc yesterday. Mr Monti insisted the disparity is unjustified.

"Auctions held on Wednesday and yesterday went rather well, but the financial turbulence absolutely isn't over," Monti said during a traditional end-year press conference.

Mr Monti also pushed for a "European" solution to the continuing debt crisis. He said the European Financial Stability Facility (EFSF) should be beefed up so that it's of a sufficient size to effectively combat the crisis.

To calm markets further, "most of the work needs to be done in Europe", he said.

The European Central Bank also weighed in yesterday to buy Italian bonds in an effort to prop up the instruments.

Despite being unable to sell all the bonds it intended to yesterday, the interest rate Italy is being forced to pay to sell some paper is considerably less than what it was last month.

Analysts said sales by the country this week should be seen positively. They also suggested that Italy could afford to keep paying above a 7pc interest rate on 10-year bonds for longer than markets anticipated. Ireland, Portugal and Greece all received bailouts after their borrowing costs remained above that level.

"Buying 10-year Italian bonds is a leap of faith which investors are prepared to take only at very high interest rates," said Nicholas Spiro of Spiro Sovereign Strategy.

"There are simply too many risks and uncertainties surrounding Italy."

Meanwhile, there was fresh speculation yesterday that the European Central Bank will slash interest rates to just 0.5pc after inflation in Germany eased to 2.4pc from 2.8pc.

The ECB's governing council member, Ewald Nowotny, also forecast that inflation in the eurozone will weaken in 2012.

"German inflation will come down pretty rapidly now and will probably be lower than the euro-area average next year," said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London.

"This will make it easier for the ECB to keep cutting interest rates."

Mr Cailloux is predicting that the ECB will cut the key interest rate by 0.25 percentage points in February and a further 0.25 points in March, to take the already record low 1pc rate to just 0.5pc.

Dermot O'Leary, the chief economist at Goodbody Stockbrokers in Dublin, also predicted earlier this month that the key interest rate will be cut to just 0.5pc by March.

That will mean immediate savings for over 400,000 tracker mortgage holders, but more than 200,000 variable rate mortgage holders aren't likely to be as lucky.

The ECB is under pressure to cut rates in an effort to prevent the eurozone from sliding into recession.

(Additional reporting by Reuters and Bloomberg)

Irish Independent

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