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Bloomberg News

Spain, Italy Auctions Highlight Dependence on ECB Purchases

September 01, 2011

(Rewrites second paragraph, updates prices.)

Sept. 1 (Bloomberg) --Spain and Italy sold bonds this week at lower yields than previous auctions, suggesting record debt purchases by the European Central Bank in the secondary market have helped to contain the nations’ borrowing costs.

Spain auctioned five-year securities today at an average yield 38 basis points below those sold at the previous auction on July 7. Investors bid for 1.76 times the amount on offer, down from 2.85 times. Italy sold 10-year debt yesterday at 5.22 percent, compared with 5.77 percent on July 28. Demand dropped to 1.27 times from 1.38. The ECB’s mandate prevents it from buying bonds directly from governments at auctions, so it purchases them in the so-called aftermarket.

“It’s the ECB that virtually sets these borrowing costs for them, and not the market,” said Michael Leister, a fixed- income strategist at WestLB AG in London. “Demand for these bonds remains weak. The ECB has been absolutely crucial in bringing Italian and Spanish yields down, enabling these countries to fund themselves at substantially lower rates than in the previous auctions.”

The ECB began buying Spanish and Italian government bonds on Aug. 8 to stop the debt crisis from spreading to the euro- region’s third- and fourth-biggest economies. The purchases brought the nations’ 10-year bond yields down to about 5 percent from euro-era records, even as Europe’s leaders disagreed over how to contain the financial-market turmoil.

Record Buying

Europe’s central bank spent a record 22 billion euros ($31.4 billion) in the week ended Aug. 12 as it bought bonds issued by Italy and Spain. The ECB settled purchases of 21 billion euros in the following two weeks, bringing its three-week total to the most since it set up the Securities Market Program in May 2010 to stabilize markets roiled by the debt crisis.

In addition to its sale of 3.75 billion euros of bonds due in March 2022, Italy also auctioned a combined 3.985 billion euros of bonds maturing in 2014 and 2018.

Spain sold 3.62 billion euros of five-year bonds, below its maximum target of 4 billion. The average yield was 4.489 percent, compared with 4.871 percent on July 7, the previous time it auctioned debt maturing in 2016. Demand dropped to 1.76 times the amount sold, from 2.85 in July.

ECB President Jean-Claude Trichet wrote to Italian Prime Minister Silvio Berlusconi in the first week of August demanding more measures to curb the deficit in return for buying the country’s bonds. To win ECB support, Italian politicians approved the second austerity package in a month on Aug. 12, aiming to balance the budget in 2013.

‘Very Dependent’

Pressure from his alliance partners later forced Berlusconi to agree to overhaul the 45 billion-euro austerity plan, dropping a tax on the highest earners and limiting funding cuts to regional governments.

“Peripheral countries are very dependent on the ECB’s bond purchases to keep their yields down, and they know it,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “Any signs that show lack of political will to tackle the fiscal problems will not go down well with the market.”

Italy had 1.6 trillion euros of debt outstanding at the end of last year, according to its debt management office, the most of any European nation. The ECB may have to buy as much as 5 percent of that amount over about 30 weeks to keep borrowing costs at 5 percent, according to Kornelius Purps, a strategist at UniCredit SpA in Munich.

Italian 10-year bond yields have climbed for nine straight days, rising five basis points to 5.18 percent before ECB’s purchases helped to reduce the yields to 5.15 percent as of 3:37 p.m. in London. They reached a euro-era record of 6.40 percent on Aug. 5, before sliding more than a percentage point to 5.02 percent in the five trading days after the ECB began buying.

The extra yield investors demand to hold 10-year Spanish notes instead of benchmark German bunds has narrowed to 286 basis points from a euro-era record of 418 basis points Aug. 5.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporters on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Keith Campbell at

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