Italy’s Borrowing Costs Decline at Auction After Government Agrees on Cuts

Dec. 28 (Bloomberg) --Italy sold 9 billion euros ($11.8 billion) of six-month Treasury bills, meeting its target, and borrowing costs plunged after the European Central Bank provided euro-region lenders with unlimited three-year loans last week.

The Rome-based Treasury sold the 179-day bills at a rate of 3.251 percent, down from a 14-year-high of 6.504 percent at the last auction of similar-maturity securities on Nov. 25. Investors bid for 1.7 times the amount offered, up from 1.5 times last month.

Demand “was quite good, a sign that market tensions have considerably eased from a month ago and that ECB liquidity may be working to support demand,” Luca Cazzulani, a senior fixed- income strategist at UniCredit Global Research in Milan, said in a note published today.

The auction was Italy’s first since the ECB offered 489 billion euros in loans to European banks last week in a bid to avoid a credit crunch. Italian lenders borrowed 116 billion euros as part of the tender on Dec. 21, according to a person with direct knowledge of the loans. A bigger test of the ECB lending on demand for European bonds comes tomorrow when Italy sells as much as 8.5 billion euros of longer-maturity debt.

Bonds Gain

Italian 10-year bonds rose for the first time in five days after the auction on bets the ECB loans are boosting demand for the nation’s debt. The yield on the country’s 10-year bond fell 22 basis point to 6.77 percent at 12:56 p.m. in Rome, narrowing the difference with Germany to 484 basis points from 508 basis points yesterday.

The Treasury also auctioned 1.7 billion euros today of zero-coupon notes due 2013, short of the maximum target, at 4.853 percent. The treasury sold the debt at 4.853 percent, down from 7.814 percent on Nov. 25.

“This may be seen by some as an indication that ‘maturity matters’ in Italian paper, with the credit risk associated with longer maturities warranting compensation,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. Today’s “overall positive results, means that tomorrow “the risks of a bad auction may be limited.”

Budget Plan

Italian Prime Minister Mario Monti secured final approval in Parliament last week for a 30 billion-euro budget plan aimed at raising revenue and boosting economic growth as he tries to persuade investors Italy can tame the country’s 1.9 trillion- euro debt and avoid a bailout. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may deepen the country’s recession and until today had done little to bring down borrowing costs.

Monti’s budget plan risks deepening the country’s economic slump and complicating efforts to cut debt. Italy’s economy contracted 0.2 percent in the third quarter and likely shrank more in the final three months, marking the fourth recession since 2001. Italy will remain in a recession until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said.

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

Italy expects to raise almost 450 billion euros from bond and bill sales next year to cover 202 billion euros of maturing bonds and pay for a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore. The remainder of the issuances will be Treasury bills.

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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