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Italy Rates Drop at Bill Auction as Concerns Ease

Italy’s borrowing costs fell at an auction of one-year bills today as the prospect that the European Central Bank could buy bonds more than offset concern that Prime Minister Mario Monti’s resignation would derail the nation’s attempts to cut its debt.

The Treasury in Rome today sold 6.5 billion euros ($8.46 billion) of 364-day bills at 1.456 percent, the lowest since March 13 and down from 1.762 percent at the previous auction on Nov. 13. Investors bid for 1.94 times the amount of bills offered, up from 1.76 times last month.

Italy’s 10-year bond yield on Dec. 10 climbed the most since August after Monti announced he intended to resign, sparking concern about the country’s commitment to meet European Union budget targets. Investors are still betting on ECB’s President Mario Draghi to keep the peace after his September pledge to buy the bonds of governments willing to sign up to reform.

“The new-found resilience of Italy’s bond market to the deepening political uncertainty in Rome underscores the game- changing nature of the ECB’s bond-buying program,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail. “The question is whether this resilience will endure in the run-up to the election.”

Political Vacuum

Monti said this week that the initial market reaction to his decision to step down shouldn’t be “dramatized” and investors “shouldn’t fear a political vacuum” in Italy.

Italy’s 10-year yield declined 4 basis points to 4.68 percent at 11:37 a.m. in Rome. That left the difference with comparable-maturity German debt at 334.3 basis points. Today’s auction was probably helped by 10.7 billion euros of redemptions due Dec. 14.

The premier said on Dec. 8 that he will submit his resignation after the 2013 budget law is passed before the end of the year. His decision came after former premier Silvio Berlusconi withdrew his parliamentary backing for the government and tossed his hat back into the political ring.

While the former EU commissioner said Dec. 10 he’s not considering becoming a candidate at the moment, pressure on him to run from centrist parties is mounting.

EU President Herman Van Rompuy and EU Commission President Jose Barroso are among European officials who warned this week that there’s no alternative to Monti’s economic policies. “Italy has no magic solutions” and the next government “needs to keep a strong commitment to reforms,” Barroso told a student group in Oslo yesterday.

Italy Funding

Italy has nearly completed its 2012 funding requirements and the borrowing target for 2013 will fall by 60 billion euros to about 410 billion euros next year because the country will face fewer redemptions and financing needs will drop by 20 billion euros, debt agency head Maria Cannata said Nov. 12. Still, any increase in borrowing costs risks having an immediate impact on a country whose debt is more than 126 percent of gross domestic product, second in the euro zone to Greece.

Italy’s national vote may be held as soon as February. Under Italian law, elections can be scheduled 45 to 70 days after the president dissolves parliament. In that period, Monti may remain premier, or President Giorgio Napolitano could appoint another caretaker.

“Should a snap election happen in February, we suspect the best-case scenario for the country would be that no clear winners emerge and another technocrat government works its way out of the ongoing debt crisis,” Annalisa Piazza, a strategist at Newedge Group in London, wrote in an e-mail to clients this week.

Italy returns to the market tomorrow with the sale of as much as 4.25 billion euros of longer-term maturity debt.

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

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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