Strong Debt Sale in Italy Does Little to Lift Spirits

On Friday, the Italian Treasury sold a total of about 4.8 billion euros ($6.1 billion) of debt, including 3 billion euros of three-year bonds priced to yield 4.83 percent, down sharply from the 5.62 percent it paid at the last auction of such securities in late December. But the bid-to-cover ratio for the three-year bonds, a measure of demand, was lukewarm at 1.2 times — below the 1.36 times at the last sale.

A day earlier, Spain sold 10 billion euros of bonds, twice the targeted amount, with yields falling about a full percentage point from previous auctions.

The European Central Bank began a new financing program last month to backstop banks, helping to restore a semblance of stability to the euro zone financial system and to hold down the rates that governments must pay to sell debt.

Yields rise as the price of the underlying bonds falls, so the fact that yields are lower suggests that investors have more confidence in the debtor’s ability to repay its borrowing.

But another confidence gauge — the gap, or spread, between Italian and German 10-year bonds — barely budged. Rome’s long-term borrowing costs are still more than three times higher than Berlin’s.

“The tone was broadly better in the wake of the Spanish auction and a run-up in the euro,” said Charles Diebel, head of market strategy at Lloyds Banking in London. But an unexplained delay in the announcement of the Italian results, he said, as well as the continuing uncertainty over the Greek debt restructuring talks, “took the shine off things.”

Mr. Diebel said Europe’s interbank lending market, where banks finance themselves on a short-term basis, remained “broken,” even after the E.C.B. began the longer-term refinancing operations. In December, the central bank lent 489.2 billion euros ($625 billion) for three years at its benchmark 1 percent interest rate.

“Unsecured lending between banks is just not happening,” he said.

That observation is backed up by European Central Bank data released Friday that showed that banks had deposited a record 489.9 billion euros overnight, almost the same amount lent under the three-year program. The figure has been elevated since the loans were made.

Separately, talks between Greece and private sector creditors over a restructuring of the country’s crushing debt were suspended Friday amid a continuing disagreement over how much of a loss banks and investors should take on their holdings.

While people involved in the negotiations described it as a more of a negotiating tactic than a sign that Greece was going to default, the disagreement was a reminder of how wide the gap remains between the two sides, even after months of discussions.

At issue, bankers and government officials say, is less the actual 50 percent write-down, or haircut, that investors would absorb with their new bonds than the coupon, or interest, these new instruments would carry.

Investors are pushing for a higher interest payout to mitigate their loss and the fact that their exposure to Greece will be lengthened considerably with the new bonds.

The International Monetary Fund and Germany, both of which have become increasingly worried about Greece’s ability to service its debts as its economy continues to plummet, are pushing for a lower rate that would ease Greece’s debt payments and require investors to take a bigger loss on their holdings.

Europe and the I.M.F. have said repeatedly that without a private sector deal, Greece will not get the 30 billion euros in bailout funds that it needs to avoid bankruptcy.

The negotiations have been complicated by the increased influence of a bloc of investors, largely hedge funds, who have bought billions of euros of discounted Greek debt and have said they will not participate in a restructuring. They are betting that Europe will blink and give Greece its money, and because the deal will be voluntary, the holdouts will get their payday.

With the breakup of the talks and the increased threat of a default, these investors may well choose to participate in the deal — in the hopes of getting something as opposed to the very little they would get if Greece went bankrupt.

A bank that borrows from the European Central Bank at 1 percent and then parks the funds with the central bank gets just 0.25 percent in interest, which means that institutions are losing money on their deposits.

The E.C.B.’s extension of huge amounts of funds “is about trying to provide the banking sector with liquidity, support the bond market and buy time” for European leaders to find a lasting solution, Mr. Diebel said. “It’s not a fix.”

Still, he said, by the time the next round of the E.C.B. refinancing operations goes through, in late February, “banks will have a lot of liquidity.”

If the more dire possibilities can be avoided until then, he added, “putting some of that liquidity into the bond market will be a lot more attractive.”

The cost of financing Spanish and Italian debt has been in the spotlight since last year, when contagion from the euro crisis that led Greece, Portugal and Ireland to seek bailouts began to spread.

Though Italy’s government deficit is actually much smaller than that of many other countries, including Britain and the United States, its public debt, a legacy of past spending and slow growth, is seen as dangerously high.

Landon Thomas Jr. reported from London and David Jolly from Paris.

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