Italy Sovereign Debt Held by Domestic Banks Rises to Record

Italian banks’ purchases of the country’s sovereign debt rose to a record in June as concerns that Italy may be forced to seek a bailout discouraged foreign investors.

Banks boosted their holdings of Italian government bonds by about 14 billion euros ($17 billion) in June to 316 billion euros, according to a Bank of Italy report today.

Italian banks “have been holding the fort at government debt auctions in the absence of foreign investors,” said Nicholas Spiro managing director of Spiro Sovereign Strategy in London by e-mail. “The run on the bond markets of Spain and Italy continues unabated and domestic banks have been left to pick up the slack. The question is how much longer they will be able to plug the gap if foreign investors continue to steer clear of Spanish and Italian debt.”

Italian banks have borrowed more than 283 billion euros from the European Central Bank and are investing part of the liquidity obtained at lower interest rates in short-term government bonds that offer higher yields. Banks increased their holdings of the nation’s bonds by about 78 billion euros in the first half.

Today’s figures “highlight foreign investors’ risk aversion and lack of appetite for Italian government paper,” Alexander Pelteshki, an Amsterdam-based analyst at ING Financial Markets, said in an e-mail. Foreign investors cut their holdings of Italian government securities by 18 percent in March from a year earlier, according to the Bank of Italy. In the same month Italian banks boosted them by 39 percent.

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