Bloomberg News

Focus Swings to Italy Debt as Greece Wins Reprieve: Euro Credit

October 28, 2011

(See EXT4 for more on Europe’s debt crisis.)

Oct. 28 (Bloomberg) -- Prime Minister Silvio Berlusconi held the first test of investor enthusiasm for Europe’s debt since its leaders agreed on a plan to end the sovereign crisis, as Italy sold bonds at euro-era record borrowing costs.

The Treasury in Rome sold a total of 7.93 billion euros ($11.24 billion), less than the maximum 8.5 billion-euro target, of four different bonds today. It sold three-year bonds to yield 4.93 percent, the highest since November 2000 and up from 4.68 percent at the last auction on Sept. 29. Demand was 1.35 times the amount on offer, compared with 1.36 last month.

“All in all, today’s auctions were not very satisfying,” Annalisa Piazza, a fixed-income strategist at Newedge Group in London. “I would have expected higher demand.”

The sales were the first conventional bond auctions in the region since European leaders ended an all-night summit in Brussels yesterday with a deal to recapitalize banks, boost the euro-area rescue fund and apply a 50 percent reduction in how much Greece will repay bondholders. Berlusconi also vowed to push through measures to improve growth and trim Italy’s debt, the second biggest in the currency union after Greece.

The yield on Italy’s benchmark 10-year bond rose five basis points to 5.92 percent as of 11:56 a.m. in Rome, up from 5.87 percent yesterday.

Early Elections?

Berlusconi, struggling to keep together his coalition before his term ends in 2013, pledged in a 14-page letter to the European Commission to raise the retirement age, ease rules to fire workers and sell 5 billion euros annually in assets over the next three years. “If we don’t respect our commitments, we won’t be credible anymore,” he told reporters in Brussels as he left the summit yesterday.

Italy has been downgraded by the three main credit rating companies during the past month, starting with Standard & Poor’s on Sept. 19, on concern that Berlusconi’s “frail” government may struggle to cut debt amid slowing growth. Berlusconi denied yesterday a report in Repubblica newspaper that he had agreed to resign in January and hold elections next March in exchange for support for the gradual pension change from the Northern League, his key coalition ally.

Berlusconi’s government on Sept. 23 cut its forecast for economic growth to 0.7 percent this year and 0.6 percent in 2012, down from the 1.1 percent and 1.3 percent estimated in April. Slowing growth may hamper efforts to cut debt amounting to 1.9 trillion euros, or 120 percent of gross domestic product.

Spread Narrows

The premium investors demand to hold Italy’s benchmark 10- year bond instead of German bunds of similar maturity was at 367 basis points today, after having narrowed 21 basis points following the summit. That’s down from a euro-era record of 416 basis points on Aug. 5, when Berlusconi unveiled a 54 billion- euro austerity plan to balance the budget in 2013 that convinced the European Central Bank to start buying Italian bonds.

“Ten-year Italian government bond yields are still awfully close to 6 percent,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “They need to be much lower before anyone can declare the crisis contained, let alone defeated.”

Italy has to repay 298 billion euros of debt next year, more than Spain, France or any other euro member. The Rome-based Treasury yesterday sold 750 million euros of inflation-linked 2012 bonds to yield 4.61 percent, up from 4.07 percent at the last auction in July.

Italy’s bond yields remain at “very high levels” and could be reduced through reform implementation, Bank of Italy Governor and incoming ECB President Mario Draghi said in a speech in Rome yesterday. Draghi, who takes over from ECB President Jean-Claude Trichet on Nov. 1, also signaled that the central bank will continue buying government bonds even as such measures remain “temporary by nature.”

ECB Action

Italian yields were reduced by more than 100 basis points in the two weeks after the Frankfurt-based institute started buying the nation’s bonds on Aug. 8. Those gains were erased in subsequent weeks as bickering within Berlusconi’s coalition delayed passage of the austerity measures sought by the ECB.

Italy’s biggest labor organizations, the CGIL and CISL, yesterday signaled they will take to the streets to prevent the government from carrying out the pledges in its letter to the EU’s executive arm. The proposed measures to make it easier to fire workers are a “nightmare,” the CGIL said in a statement on its website.

‘Seriously Harmful’

Berlusconi, speaking in an interview on Canale 5 television today, said the plan will create jobs and boost competitiveness, not increase firing. “It’s essential to maintain the government and implement the reforms,” he added. “Toppling the government now would leave a six-month gap before elections, which would be seriously harmful” for the country.

The summit came amid mounting global pressure on the euro- area to quarantine Greece and prevent speculation against Italy, Spain and France from triggering the second global recession in three years. The writedown on Greek bonds gave that country a reprieve by smoothing a second bailout and making its debt more sustainable, aiming to reduce it to 120 percent of GDP in 2020.

The summit outcome means Italy is now “the country to watch,” Wolfgang Munchau, co-founder of Eurointelligence, which analyzes the euro-area economy, told Bloomberg Television’s “Countdown” with Mark Barton. “If the thing fails, it’s because of Italy and not because of Greece.”

--Editors: Jeffrey Donovan, Mark Gilbert

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.


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