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Italy Seen Struggling to Attract Buyers to Bill, Bond Auctions

Italian Prime Minister Silvio Berlusconi
Italian Prime Minister Silvio Berlusconi. Photographer: Alberto Pizzoli/AFP/Getty Images

Italy may struggle to sell 5 billion euros ($6.8 billion) of Treasury bills tomorrow, after bond yields surged to euro-era records on Prime Minister Silvio Berlusconi’s resignation offer and LCH Clearnet SA demanded more collateral on the country’s bonds.

Italy auctions one-year bills tomorrow at 11:00 a.m. in Rome, followed by a sale of five-year bonds on Nov. 14. The auction comes after the country’s 10-year bond yield jumped 57 basis points to 7.33 percent, crossing the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts. Italy paid 3.57 percent the last time it sold one-year bills on Oct. 11. Similar maturity debt currently yields about 8.41 percent.

“At the current yield levels, Italy may have trouble to find buyers in the market,” Alessandro Giansanti, senior interest-rate strategist at ING Groep NV in Amsterdam. “Italy faces only Treasury-bill redemptions until February 2012. We could expect a reduction in the issuance of bonds for the next three months.”

Italian bonds slumped today after LCH, Europe’s largest clearing house, increased the deposit it demands from clients to trade the country’s securities. The decision came hours after Berlusconi lost his parliamentary majority in a key vote and said he would resign once the legislature passed austerity measures pledged to European Union allies to trim the euro-region’s second-biggest debt.

“The LCH decision to increase the margin requirement on Italian debt was clearly unsettling as it represented a milestone on the road trodden previously by euro zone bailout candidates,” said Stephen Lewis, chief economist at Monument Securities Ltd. in London.

Cash Cushion

The Italian Treasury probably has cash reserves of about 35 billion euros, according to Gianluca Ziglio, a London-based interest-rate strategist at UBS AG, which may give the Treasury room to skip auctions later in the year. The sales scheduled for tomorrow and Nov. 14 will likely go ahead, Ziglio said.

“The possibility that the Treasury cancels the auctions tomorrow and Monday is unlikely, because this would be a very negative sign for the market,” he said.

With a debt of 1.9 trillion euros, bigger than that of Greece, Spain, Portugal and Ireland combined, Italy can’t afford to stay out of markets for long. The country faces about 200 billion euros in bond maturities in 2012 and another 108 billion euros of bills. The first bond redemption comes Feb. 1, when Italy must pay back 26 billion euros for debt sold 10 years ago.

The jump in Italian yields is boosting financing costs, which the government estimated in September would be 76.6 billion euros this year, or 4.8 percent of gross domestic product. Prior to today’s surge, rising yields had added another 0.3 percent of GDP to the price tag, according to an estimate by Mizuho International Plc. Open Europe estimated in a note yesterday that the country would face 28 billion euros in additional interest payments in the next three years, wiping out about half the projected budget savings through 2014.

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