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Italy Can Withstand Increase in Borrowing Costs for Few Years, BIS Says

Italy will be able to withstand an increase in borrowing costs for at least for a few years as its relatively long debt maturity helps mitigate the effects of record bond yields, the Bank for International Settlements said.

The cost of servicing its debt would rise by just 0.95 percent of gross domestic product next year if 10-year yields stayed at the record 7.48 percent reached last month, the BIS said, citing its own calculations. The “worst-case scenario” would have to persist for three years for the additional costs to exceed 2 percent of output, the bank said.

“Simple simulations of the debt-service costs of the Italian Treasury in different yield-curve scenarios suggests that Italy should be able to withstand elevated yields for some time, provided it retains access to the market,” the BIS said in its Quarterly Report published yesterday. “Given the relatively high average residual maturity of the Italian public debt, it would take a long time” for these yields to translate into “significant additional debt service costs.”

The average maturity of Italian debt is seven years, according to the BIS. That compares with six years in Portugal and Germany and slightly longer than seven years in France.

The Italian government bond market is the world’s third largest after Japan and the U.S., with 1.9 trillion euros ($2.54 trillion) in outstanding debt and 1.6 trillion euros in marketable securities, according to the BIS.

Debt Repayment

Italy’s debt-servicing costs will rise to 5.1 percent of GDP in 2012 from 4.2 percent this year, and climb to 5.6 percent in 2013 if 10-year bond yields remain near 7 percent, the employers’ lobby group Confindustria said this month.

European leaders last week unveiled a blueprint for a fiscal accord they hope will deliver the region from the debt crisis that has entered its third year and threatened to spread to Italy and Spain. The Franco-German-led agreement, which provides tighter budget rules and an additional 200 billion euros ($267 billion) to the euro war chest, is part of an effort to reassure investors that leaders can master the crisis.

The euro zone’s third-largest economy has to repay about 53 billion euros ($71 billion) in the first quarter alone from the region’s total maturing debt of 157 billion euros, according to UBS AG. It owes further 3.2 billion euros in interest payments based on the average five-year yield in the past three months.

The yield on five-year Italian notes rose 13 basis points to 6.80 percent as of 9:18 a.m. London time while the 10-year yield advanced 14 basis points to 6.50 percent.

Italy plans to raise 3 billion euros of five-year debt on Dec. 14. The country has met 96 percent of its financing requirements for this year, according to UBS.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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