Italy Sells Maximum Amount at Auction After Banking Deal

Italy sold the maximum amount offered at an auction of 10 and 5-year debt today after European Union finance chiefs struck an agreement on how to handle failing banks, restoring investors’ confidence.

Italy sold 2.5 billion euros ($3.3 billion) of bonds maturing in May 2023 at 4.55 percent, the highest since March 27 and up from 4.14 percent at a May 30 auction. Investors bid for 1.46 times the amount offered, up from 1.38 last month. The Treasury also sold 2.5 billion euros of debt maturing in 2018 at 3.47 percent, up from 3.01 percent. The total amount of the auction was at the top of the announced range.

“Demand was well supported by those dealers who bet on some re-alignment in spreads,” Annalisa Piazza, an analyst at Newedge Group in London, wrote in a note after the sale.

Italy’s 10-year bond yield dropped 12 basis points to 4.58 percent at 12:46 p.m. in Rome, pushing the difference with comparable-maturing German Bunds to 285.7 basis points

Banking Agreement

After seven hours of emergency negotiations in Brussels, finance ministers settled on guidelines for assigning losses to private creditors and regulating public assistance.

They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro firewall fund.

The deal comes at a time when investors are concerned about a withdrawal of liquidity from central banks in the next months. Markets around the world tumbled last week in response to Fed Chairman Ben S. Bernanke’s announcement that the central bank may start reducing bond purchases that have fueled gains in markets globally.

European Central Bank President Mario Draghi has tried to reassure markets this week by reiterating the ECB’s monetary policy will stay accommodative and the central bank is ready to act if needed.

Under Scrutiny

Today’s sale comes as Italy’s public finances are under scrutiny after the Financial Times reported yesterday that the country faces losses of 8 billion euros on about 32 billion euros of derivatives. “There won’t be any negative impact on public accounts,” Finance Minister Fabrizio Saccomanni said at a press conference in Rome yesterday. “These are instruments used to manage interest-rate risk.”

Prime Minister Enrico Letta is facing the difficult task of boosting growth while keeping the budget commitments made with the EU at a time when bond markets are volatile and the legal issues of his ally and former premier Silvio Berlusconi threaten the stability of his government.

Yesterday his cabinet passed a package of measures to boost employment and delayed by three months a planned increase of the value-added tax from July.

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