Italy, Spain Offer 17 Billion Euros Debt in First 2012 Sales

Italy and Spain will seek to sell as much as 17 billion euros ($21.5 billion) in debt as Premier Mario Monti seeks recognition for austerity efforts and Prime Minister Mariano Rajoy vows to meet his budget-deficit goal.

In their first auctions of 2012, Spain will sell as much as 5 billion euros of bonds, including a new three-year benchmark security. Italy, which needs to repay more than 50 billion euros in bonds in the first quarter, will sell as much as 12 billion euros of bills today and 4.75 billion euros of bonds tomorrow.

“Spain is going to place plenty of paper and the Italians will have a more modest result, but good enough to keep liquidity going,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, said in a phone interview. “This has been the trend and I have no reason to think this is going to change.”

Monti and Rajoy are struggling to convince investors that they can put their nations’ finances in order and tame surging borrowing costs amid Europe’s sovereign debt crisis. Yesterday, Spain’s Parliament approved Rajoy’s 15 billion-euro austerity package, while Monti urged investors to reward his efforts to cut Italy’s 1.9 trillion-euro debt after a meeting with German Chancellor Angela Merkel.

Yields Fall

While the yield on Italy’s 10-year bond remains near the 7 percent level that prompted Greece, Ireland and Portugal to seek bailouts, it was down 10 basis points at 6.88 percent at 9:15 a.m. Rome time. Spanish debt has fared better with its 10-year yield at 5.24 percent, down eight basis points from yesterday.

“Despite a worse-than-expected outcome for Spain’s 2011 fiscal deficit and ongoing concerns over banks’ bad debts, yields on Spanish government bonds have fallen in recent days on better sentiment across the region,” Sarah Hewin, a senior economist at Standard Chartered Bank in London, said by e-mail. “Italy has substantial rollover requirements, so the outcome of upcoming bill and bond auctions” will be “closely watched.”

Before the sale, Moody’s Investors Service cut the credit rating of the Spanish region of Valencia for the second time in a month after it missed a 123 million-euro payment to Deutsche Bank AG. Moody’s also placed the ratings of Spain’s 16 other regions on review for a downgrade, citing concerns over their ability to meet this year’s budget-deficit target.

Meeting Goal

Regional overspending is responsible for Spain missing its 2011 deficit goal. The shortfall is expected to be a third larger than the forecast 6 percent of gross domestic product, the government said on Dec. 30. Rajoy has pledged to meet this year’s goal of 4.4 percent.

Spain and Italy have benefited from the support of the European Central Bank, which began buying their bonds in August and has purchased 213 billion euros of euro-region government securities since May. The Frankfurt-based ECB also loaned banks a record 489 billion euros for three years on Dec. 21 to avert a credit crunch. Lenders have parked almost all of those funds back at the ECB, thwarting attempts to ease the flow of credit.

Both Italy and Spain are on the verge of a recession along with the rest of the euro area, which grew 0.1 percent in 2011’s third quarter, less than previously estimated. Germany, Europe’s largest economy, shrank “roughly” 0.25 percent in the fourth quarter from the third, the nation’s Federal Statistics Office in Wiesbaden said in an unofficial estimate yesterday.

Investors are set to get their first glimpse of the ECB’s 2012 strategy as President Mario Draghi chairs a policy-setting meeting of the Governing Council for a third time. The central bank will leave its key refinancing rate at 1 percent, according to the median of 53 forecasts in a Bloomberg News survey. The decision will be announced at 1:45 p.m. Frankfurt time.

Two-Year Gain

Spain’s two-year notes gained for a fourth day, with the yield dropping 16 basis points to 2.93 percent at 9:19 Rome time, the lowest since April. Similar-maturity Italian yields fell 8 basis points to 4.62 percent.

Spain today will auction securities maturing in July 2015 with a coupon of 4 percent and sell additional 3.25 percent notes due April 2016 and 4.25 percent debt maturing in October 2016. Spain on Dec. 1 was forced to pay 5.187 percent to borrow until 2015, compared with the 3.9 percent Germany last paid to sell similar-maturity debt.

Last Sales

Italy sold 7 billion euros of one-year bills at an auction on Dec. 12 at 5.952 percent. That was less than the 6.087 percent the Rome-based Treasury paid at the previous auction of similar securities on Nov. 10, the highest rate in 14 years.

Monti, who spent his first month in office enacting 30 billion euros in austerity and growth measures, faces almost half a trillion euros of debt sales this year. Italian bond yields don’t adequately reflect his debt-cutting efforts, he told a press conference in Berlin yesterday.

“What Italians are hoping and what I hope for is that, before the months it takes for good economic policy to translate into higher growth, there will be a decline in high interest rates in financial markets that may have been more or less justified when there was a lot of concern about Italy, but that aren’t justified anymore,” Monti said.

European leaders, who are striving to tamp down the debt crisis that began in Greece in 2009 and infected Italy, Spain and France, are setting the stage for a European Union summit on Jan. 30 meant to focus on bolstering jobs and growth. Pressure is meanwhile growing to complete a Greek debt swap agreed on in October that is needed to put a second rescue plan in place and keep the euro area together.

Merkel and French President Nicolas Sarkozy are scheduled to travel to Rome on Jan. 20 for joint talks with Monti, who heads the euro area’s third-largest economy. Both have expressed support for Monti’s effort to cut Italy’s debt. The premier has also pledged to unveil an economic growth plan on Jan. 23.

“Monti’s new growth plan is more than welcome, but at this stage implementation is the key,” Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London, said in an e-mail.

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