Italy was obliged to pay the highest rate in more than a decade to sell a new bond issue, a sign that investors remained wary of the country’s political paralysis and a debt load equal to 120 percent of yearly economic output. If Italy’s borrowing costs become unsustainable, the country is potentially a much greater threat than Greece to Europe and the world economy.
“The current Italian government has lost the confidence of investors,” said Alessandro Giansanti, a rates strategist at ING in Amsterdam.
Elsewhere in the troubled euro zone, a big loss by an Austrian bank served as a reminder of the fragility of financial institutions, while a German supreme court decision scrambled efforts to speed up political decision making. In the meantime, the head of Europe’s bailout fund turned to China to invest in the fund.
The shift in mood Friday was sudden and stopped a rally only a day after it began.
On Thursday, major European indexes soared and bank shares rebounded after an all-night session in Brussels by European leaders that produced the boldest response yet to the debt crisis.
While major European stock indexes on Friday largely held on to their gains from the day before, investors seemed to be reflecting on the unanswered questions in the latest rescue package.
The plan, which was short on details, includes measures to bolster the resiliency of banks, to ease Greece’s crushing debt load and to turbocharge the euro area’s $623 billion rescue fund.
The benchmark indexes in Frankfurt, Paris and London were little changed at the end of trading Friday, while Italian shares fell 1.8 percent. The euro barely budged, trading at about $1.42.
The Euro Stoxx 50 index of euro zone blue chips closed down 0.6 percent, while markets in Britain and Paris were also slightly lower. Germany’s DAX was up 0.13 percent.
In the United States, the Standard Poor’s 500-stock index registered a microscopic increase of 0.04 percent, ending the week up more than 3 percent, mainly on Thursday’s lift from the summit meeting in Brussels and a report of growth in the American economy.
European technocrats are now charged with working out in the weeks ahead the specifics behind the broad outlines of Thursday’s plan. The pace is unsettling for markets, but that is the methodical way that European leaders are determined to operate. Elected officials are focused on their reluctant voters, not on investors impatient for bold initiatives.
“If you ask someone on the street, they’ll say they want the Deutsche mark back,” said Martin Lueck, an economist at UBS in Frankfurt. “This is why the politicians need to move in a piecemeal fashion. They need to keep people on board.”
Officials of the European Union and the International Monetary Fund hoped that Thursday’s deal would soothe market anxiety by easing the terms of Greece’s debt repayments enough to avoid default, as well as by building a war chest for safeguarding the larger Italian and Spanish economies against possible contagion.
But the lack of confidence in the plan was evident in the rise in interest rates on the bonds of both Italy and Spain. Benchmark yields jumped 14.4 basis points (about one-seventh of a percentage point) to 6.01 percent in Italy and 17.7 basis points to 5.49 percent in Spain.
Italy was supposed to help its own case this week by producing concrete evidence that it was streamlining its economy and cutting public debt. But Prime Minister Silvio Berlusconi’s government, weakened by internal strife, delivered only promises, handing officials in Brussels a letter of intent describing hoped-for measures.
While Italy has a relatively low annual budget deficit, the ratio of total debt to gross domestic product is second-highest in the euro zone after that of Greece.
The market’s skepticism showed in the auction results Friday. The Italian Treasury sold 3 billion euros of bonds due in 2022 at 6.06 percent, the highest rate since the creation of the euro. Italy also sold 3.1 billion euros of bonds due in 2014 to yield 4.93 percent, up from 4.68 percent at their last auction on Sept. 29.
Elisabetta Povoledo and Gaia Pianigiani contributed reporting.
Article source: http://www.nytimes.com/2011/10/29/business/global/italys-borrowing-costs-rise-amid-uncertainty-about-rescue.html?partner=rss&emc=rss
Speak Your Mind
You must be logged in to post a comment.