Italy borrowing rates drop again in bond auction


Italy saw its borrowing costs drop for a second day in a row today as it easily raised 4.75 billion euro in a bond auction that indicated improved investor confidence in the country's financial future and the 17 countries that use the euro. 

The auction caps a week of good news which yesterday saw a successful bond auction in Spain and the European Central Bank's president, Mario Draghi, announcing that he had spotted "tentative signs of stabilisation" in the European economy and that the ECB had prevented a serious credit contraction in the euro area with a massive injection of cheap funds in December. 

However investors and markets recognise that, while some progress has been made this week, a long haul to full European economic recovery lies ahead. 

Investors demanded an interest rate of 4.83 per cent to lend Italy three-year money, down from an average rate of 5.62 per cent in the previous auction and far lower than the 7.89 per cent in November, when the country's financial crisis was most acute. 

While Italy paid a slightly higher rate for bonds maturing in 2018 which were also sold in today's auction, demand was between 1.2 per cent and 2.2 per cent higher than what was on offer. 

However, the results were not as strong as those of bond auctions the previous day, when Italy raised 12 billion euro and Spain saw huge demand for its own debt sale. 

Marc Ostwald, strategist at Monument Securities, said the results were disappointing compared with the successful bond auctions yesterday.

"Overall, it underscores that while all the auctions in the eurozone have been battle victories, the war is a long way from being resolved (either way)," he said in a note. "These euro area auctions will continue to present themselves as market risk events for a very protracted period." 

Italy's 1.9 trillion euro in government debt and heavy borrowing needs this year have made it a focal point of the European debt crisis. Fitch Ratings Agency, which has said it would consider whether to downgrade Italy's credit rating by the end of the month, estimates the country needs to borrow 360 billion euro this year.