December 5, 2023

Italy Sees Borrowing Costs Fall

But Rome’s financial position remains precarious and investors said it would require continued support from the European Central Bank to avoid seeing its funding costs rise again.

The auction of 10-year bonds was the first since the E.C.B. started buying Italian and Spanish debt in the secondary market three weeks ago — an extraordinary measure begun after their borrowing costs soared to 6 percent.

On Tuesday, the Italian Treasury sold €3.75 billion, or $5.4 billion, of 10-year securities at 5.22 percent. That compared to a rate of 5.77 percent at a sale of similar bonds in late July.

Demand at the auction was 1.27 times the amount on offer, down from the level at the last auction of 1.38 times. The Treasury also sold €2.99 billion of bonds maturing in 2014.

“Italy is still able to fund itself at ‘market rates’ but those are being artificially depressed by the E.C.B.’s bond buying,” said Eric Wand, an interest rate strategist at Lloyds Bank Corporate Markets in London.

He said that there had been speculation among traders that the E.C.B. had bought Italian bonds in the market after the auction. “If the E.C.B. was not around, the situation would be a lot worse,” Mr. Wand said.

The E.C.B. is not permitted under European treaties to buy bonds directly from governments, meaning it can only provide secondary market support.

The yield on the country’s benchmark 10-year bond was stable around the auction at about 5.13 percent. It has dropped more than 100 percentage points since the E.C.B. began buying Italian and Spanish debt on Aug. 8.

Italy had €1.6 trillion of debt at the end of last year, according to its debt management office, making it Europe’s biggest national bond market.

Seeking to address concerns about its fiscal position, Prime Minister Silvio Berlusconi and other senior officials met Monday to amend a recently drawn-up fiscal package designed to net €45.5 billion in savings. Among the changes being discussed are dropping a tax on the high earners and limiting funding cuts to regional governments, Bloomberg News reported from Rome.

The Lower Chamber of Parliament will start debating the program next week and it is expected to be voted on by mid-October.

Euro-area governments are working on ratifying changes aimed at bolstering the region’s primary bailout mechanism, known as the European Financial Stability Mechanism. But analysts said that will take time and in the interim, countries like Italy and Spain will continue to need support from the E.C.B.

Last week, the bank bought €6.651 billion in euro-area bonds, and that figure is expected by analysts to rise this week.

Spain is also planning a bond sale of five-year paper on Thursday.

While the Italian bond auction appeared tepid, there was also more evidence Tuesday that the European economy is slowing amid the escalation in the sovereign debt crisis and recent turmoil in financial markets.

The European Commission’s economic sentiment index for the euro area fell to 98.3 in August from a revised 103.0 in July. The reading was lower than analysts’ estimates of 100.5 and was the lowest level since February 2010.

The weakening in sentiment in August was across the board, with both industry and services confidence shedding around 4 percentage points, while consumer confidence was down more than 5 percentage points.

“All in all the current level of the economic sentiment indicator, if confirmed in September, probably indicates that the recovery in the euro-zone has come to a standstill,” said Peter Vanden Houte, an analyst at ING. “A small negative growth figure in the third quarter seems no longer excluded.”

Bucking the general trend, however, Italian business confidence unexpectedly rose in August as manufacturers become more optimistic about demand for their goods, another report showed.

Over all, the recent data on the economy and growth are adding to expectations that the inflation rate in the euro area may have peaked.

Jean-Claude Trichet, the E.C.B.’s president, told a committee of the European Parliament on Monday that the economic recovery might be weaker than expected, suggesting the bank might lower its growth and inflation assessments.

Preliminary inflation figures for August from Germany and Spain have both been below market expectations. Euro-area data will be released Wednesday.

Stock markets were mixed Tuesday. The FTSE-100 rose by over 2 percent in London, following a public holiday in Britain Monday. But other European indexes declined. The SP 500 futures contract slid 0.5 percent, indicating a weaker start on Wall Street.

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