Sunday 19 November 2017

Italian bond auction highlights eurozone nation's woes

Italy's Prime Minister Mario Monti. Photo: Getty Images
Italy's Prime Minister Mario Monti. Photo: Getty Images

Szu Ping Chan

Signs that Italy faces a tough start to 2012 were evident on Thursday as the country's final bond sale of the year saw nervous investors demand close to 7pc to hold the ailing nation's 10-year debt.

The closely-watched auction saw Italy sell €2.5bn of 10-year bonds at an average rate of 6.98pc, down from euro-era highs of 7.56pc at an auction on November 29, but still at levels regarded as unsustainable. Demand outstripped supply by a ratio of 1.36 to one, compared with 1.34 at the last auction.

Italy raised a total of €7bn in four separate auctions after a successful short-term debt sale on Wednesday. The Treasury had planned to sell between €5bn and €8.5bn of bonds.

The euro slipped to $1.2892 against the dollar - the weakest since January - and dropped to a decade low against the yen of ¥100.06 after the auction. However, volumes were low with individual orders exaggerating moves.

Analyst reaction was mixed. Alessandro Mercuri, interest rate strategist at Lloyds Banking Group, said the auction was "decent even though slightly disappointing (compared) with yesterday's.

"The 2022 bond was well bid, they sold €2.4bn at the high end of the €2.5bn range. The key thing that we saw yesterday was that Italian paper still commands a maturity premium. People are still concerned about the credit risk so the longer the maturity the higher they pay," he said.

But Nicola Marinelli, fund manager at Glendevon King Asset Management, said that a bid-to-cover ratio of 1.36 for long-term debt was "nothing to be excited about".

"We're still at a crossroads. We don't know if it's going to be a happy ending or a complete disaster. But I don't see this situation lasting forever," he said.

"For the time being Italy is able to service its debts at quite high yields but it's not sustainable in the long term, so something has to change."

Italy must refinance €336.5bn of debt in 2012, including €113bn in the first three months of the year.

Mario Monti, Italy's Prime Minister, said that the market turmoil that has driven up Italian borrowing costs isn’t over and that confidence in Italy’s debt will return "slowly," as he called for a united response to stem the crisis.

"The problem that the markets are experiencing at the moment is above all a European problem that needs a common, joint, convincing response," Mr Monti told a press conference in Rome.

Italy's caretaker government passed a new, €30bn austerity package this month that includes spending cuts, tax rises and pension reforms.

Ahead of the Italian bond sale, nervous investors pushed UK 10-year gilt yields to a record low of below 1.962pc in a flight to safety.

Describing Britain as "a beacon of sanity in Europe," David Miller, Partner at Cheviot Asset Management said the shift was "a partial vote in favour of the UK," though another analyst described the record low as end-of-year "messing around" amid thin trading.

There was also muted reaction from the stock markets. The FTSE 100 in London stayed higher, up 0.2pc at 5,517.31, while the FTSE Mib in Milan stayed flat at 14,803.17.

Elsewhere in Europe, the CAC 40 in Paris rose 0.2pc to 3,078.03, while Frankfurt's DAX crept up 0.4pc to 5,793.52.

Separately, Italian business morale fell to its lowest level for two years in the latest indication that the country is already in recession.

A fall in orders and a deteriorating production outlook contributed to Italy's official business confidence index falling to 92.5 in December, well below the 100 level that divides optimism from pessimism, and down from 94 the month before.

The Italian economy contracted 0.2pc in the three months to September, indicating that the country may be pushed into its fifth recession in a decade.

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