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Italy Borrowing Costs Rise at Bill Sale on Political Turmoil

Italy Borrowing Costs Rise at Bill Sale on Political Turmoil
Italy has Europe’s second-biggest debt after Greece at more than 120 percent of gross domestic product and the Treasury needs to sell more than 30 billion euros of bonds and bills a month. Photographer: Alessia Pierdomenico/Bloomberg

Feb. 26 (Bloomberg) -- Italy’s borrowing costs rose to the highest in almost four months one day after elections that produced a hung parliament, creating the risk of another vote this year.

The Rome-based Treasury auctioned 8.75 billion euros ($11.5 billion) of six-month bills today at 1.237 percent, the highest since Oct. 29 and up from 0.731 percent at an auction of similar maturity debt Jan. 29.

Democratic Party leader Pier Luigi Bersani, the pre-election favorite, won in the Chamber of Deputies by a margin of less than half a percentage point over former Prime Minister Silvio Berlusconi. While Italy’s voting rules award him a majority of the 630 seats in the Chamber, Bersani will fall short of controlling the Senate even if he strikes a post-election alliance with outgoing Prime Minister Mario Monti.

“The inconclusive outcome of the Italian general elections has already weighed on Italian supply,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said by e-mail after the auction.

Italy’s 10-year bond yield rose 32 basis points to 4.82 percent after the sale at 12:44 p.m. in Rome. That’s the highest in more than three months. Italy returns to the market tomorrow with the sale of as much as 6.5 billion euros of five- and 10-year bonds.

Debt Load

Italy has Europe’s second-biggest debt after Greece at more than 120 percent of gross domestic product and the Treasury needs to sell more than 30 billion euros of bonds and bills a month.

Prospects for Italian debt remain “gloomy” with growing risks the rating agencies might downgrade the country due to political uncertainties, Piazza said. In order to assemble a working government, Bersani may try to seek the support of Grillo’s anti-establishment party or try to build up a so-called grand coalition. Should he fail to assemble a government, Italy’s President Giorgio Napolitano may appoint a caretaker premier to pass urgent reforms or call new elections.

“Ethically, politically, ideologically and personally there is no way that a lasting coalition can be formed, so new elections seem inevitable,” James Walston, a politics professor at Rome’s American University, said by e-mail. If the older parties fail to address the issues, in the next election “the populists will do even better, the cost of Italy’s debt will spiral out of control and the whole euro system will be threatened,” Walston said.

Bigger Test

At today’s auction, investors bid for 1.44 times the amount of the debt offered, down from 1.65 times last month.

Today “demand held up rather well giving a constructive signal ahead of tomorrow’s more challenging” sale of a new 10-year bond, said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan.

A temporary grand coalition would be “the most market friendly scenario” and “reforming the electoral law should be the priority,” Barclays Capital economists including Fabio Fois wrote today in a note.

-- Editors: Andrew Davis, James Hertling

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

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

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