Italian banks soak up bond issue as ratings cut
ITALIAN banks came to the rescue yesterday after the country suffered a ratings downgrade, but while Rome cut its three-year borrowing costs at auction, a rise in 10-year bond yields highlighted concern it may fall victim to Europe's debt crisis.
Moody's cut Italy's sovereign debt rating to Baa2 yesterday, citing doubts over Italy's long-term resolve to push through much-needed reforms and saying persistent worries about Spain and Greece were increasing its liquidity risks.
Solid domestic demand helped the Italian Treasury sell the top planned amount of €5.25bn in bonds, paying less than a month ago on three-year paper.
"This was a challenging enough auction without the downgrade which makes the result look all the more impressive," said Spiro Sovereign Strategy managing director Nicholas Spiro.
"Once again, the Treasury was able to get its debt out the door, which right now is the overriding priority."
A new 2015 bond was sold at an average 4.65pc rate, compared with the 5.3pc Italy paid in June.
Italian banks' commitment to support Rome's refinancing of its €2trn debt and a broad domestic investor base have provided a safety net for Italy throughout the crisis.
Foreign investors' reluctance to hold Italian debt, however, keeps the yields under pressure. Benchmark 10-year-bond yields were up nine basis points around 6pc, while Italy's debt insurance costs also rose.
The US rating agency lauded Prime Minister Mario Monti's commitment to fiscal reforms and structural consolidationbut warned it could again cut the country's marks if the next Italian government failed to continue along this path.
"The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population," it said.
"The political climate, particularly as the spring 2013 elections draw near, is also a source of implementation risk."
Respected technocrat Monti, who was called in last November to pull back Italy from the cliff edge and avoid a Greek-style debt crisis, has said he will stand down next year. (Reuters)