Italy’s Borrowing Costs Drop Sharply at Auction

The sale of €9 billion, or $11.8 billion, of six-month Treasury bills was seen as the first post-holiday pointer to the continuing woes of the euro zone.

The debt sold at 3.251 percent, sharply down from 6.504 percent at a previous auction in late November. Demand was 1.7 times the amount on offer, compared with 1.47 times previously.

The lower borrowing costs appeared to reflect the impact of a new austerity package in Italy, as well as a massive infusion of cheap, long-term liquidity into euro zone banks by the European Central Bank last week.

Italy plans a sale of long-term debt on Thursday, which analysts said would be a more significant indicator of market sentiment.

In a positive sign, the yields on Italian 10-year bonds were down about 20 basis points Wednesday, to 6.7 percent. That was still uncomfortably close, however, to the 7 percent level that is regarded by economists and analysts as unsustainable.

The auction came as the E.C.B. reported banks in the euro zone had deposited a record amount of overnight funds for the second day in a row. Banks parked €452.03 billion for 24 hours, beating a previous record of €411.8 billion set on Tuesday.

The heavy use of the deposit facility is seen as evidence that banks in the euro zone remain wary about lending to each other, although analysts note that market activity has been muted because of the end of the year holidays, and there is more cash in the system following the E.C.B.’s action.

Reaction on European stock markets was muted, with most major indices up less than 1 percent, while the euro was stable at just under $1.31.

Italy has been in the spotlight as a result of slow growth combined with escalating borrowing costs and a huge debt equal to 120 percent of gross domestic product. The country needs to raise €450 billion during 2012.

Mario Monti, a technocrat prime minister who replaced Silvio Berlusconi last month, has confronted the crisis with an austerity program that includes tax increases and pension cuts.

Ahead of the auction, the Italian business daily Il Sole 24 Ore commented that the sale would have “the task of closing with a positive note a horrible year for Italian bonds.”

Spain’s long-term borrowing costs also fell about 20 points, to 5 percent, Wednesday, while benchmark German Bunds were steady at 1.9 percent.

Article source: http://www.nytimes.com/2011/12/29/business/global/italys-borrowing-costs-drop-sharply-at-auction.html?partner=rss&emc=rss