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LCH Lowers Cost to Trade Italian Bonds as EU Prepares to Meet

LCH Clearnet SA, Europe’s biggest clearinghouse, lowered the extra deposit it demands from clients to trade Italian government bonds as European Union officials prepare to meet to address the region’s debt crisis.

The margin needed for Italian bonds due in seven to 10 years will be lowered to 8.15 percent, LCH Clearnet said in a document on its website dated today. That compares with a charge of 11.65 percent announced on Nov. 8. The reduced costs will be applied at the close of trading today for all bonds, with the amount based on maturity. Italy’s Cassa Compensazione e Garanzia SpA also said it changed the margin, or deposit, it charges clients to trade Italian government bonds.

Governments from Italy to Spain are cutting spending to reduce bond yields that reached euro-area records of more than 7 percent last month. The cost of insuring euro zone government bonds against default also rose to a record on Nov. 25 on concern a member of the single currency would default. The Markit Itraxx Sovx Western Europe index of credit-default swaps on 15 governments was at 326 basis points in London yesterday, down from its peak of 385, according to Markit prices.

“This shows they are getting more comfortable given the big move in Italian yields,” said George Goncalves, head of interest rate strategy in New York at Nomura Holdings Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “There are still a lot of things that can go wrong, but the market is growing more cautiously optimistic about Europe’s problems.”

Deposit Factor

The so-called deposit factor for Italian bonds due in seven to 10 years will be 8.15 percent starting tomorrow, Borsa Italiana’s CC&G said in a document on its website today. That compares with 11.65 percent on Nov. 9.

Austerity measures announced by governments in Italy and France have reduced 10-year yields to 5.99 percent and 3.21 percent, respectively, from as high as 7.48 percent and 3.82 percent in November.

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, three euro-area officials with knowledge of policy makers’ deliberations said.

Italy’s debt-to-gross-domestic-product ratio was 118 percent last year, according to Eurostat.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private.

EU Summit

French President Nicolas Sarkozy and German Chancellor Angela Merkel proposed amending European treaties to tighten rules on deficit spending and water down provisions demanding investor losses. In a joint letter to European Union President Herman Van Rompuy, the leaders said they want a decision at an EU summit so that the measures can be ready by March 2012.

Italian government bonds have lost 5 percent this year, according to Bank of America Merrill Lynch indexes, underperforming the 5.1 percent return in the so-called Group of Seven countries.

Clearinghouses guarantee investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

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