Successful debt auctions give boost to Spain and Italy

 

Spain and Italy gave financial markets a boost as they successfully raised nearly €22 billion ($27.98 billion) in two keenly watched debt auctions that showed renewed investor confidence in the countries' attempts to get a grip on their debt problems.

Spain sold nearly €10 billion ($12.7 billion) in auctions of bonds maturing in 2015 and 2016, with demand strong and the amount sold double the maximum sought. Italy saw its borrowing costs drop sharply as it sold €12 billion ($15 billion) in what was also its first test of market sentiment this year.

Both debt-laden countries have been the focus of worries that they might be dragged further into the crisis threatening the 17 countries that use the euro as their currency that has already forced Greece, Ireland and Italy to seek billions in bailout money.

Buyers also took €8.5 billion in 12-month Italian bonds at a yield of 2.735 percent, sharply down from last month's rate of 5.95 percent. They also bought €3.5 billion ($4.45 billion) in bonds maturing in May at 1.644 percent interest, down from 3.251 percent last time.

Market reaction in both countries was good. In the secondary market, where issued bonds are then traded openly, the yield for Italy's benchmark 10-year bond dropped to 6.6 percent from around 7 percent, a perilous level that forced other eurozone nations to seek bailouts.

The rate for the Spanish 10-year bond also dropped back to 5.15 percent after opening at 5.32 percent.

Meanwhile, the European Central Bank maintained its lending rate at 1 percent Thursday with President Mario Draghi saying there were "tentative signs of stabilization of activity at low levels" in the troubled eurozone.

Boosting liquidity has been the institution's principal tool against the crisis as it aims to encourage banks to continue lending to companies so they can operate and grow.

Europe's other leading central bank, the Bank of England, also kept its lending rate at a record low of 0.5 percent.

Nicholas Spiro of London-based consultancy Spiro Strategy said the Italian auction showed that ECB efforts to pump liquidity into the sector were working.

"Few would have predicted as recently as last month that Italy would be paying as little as 2.7 percent for 1-year paper," he wrote. "This is on a par with Italy's borrowing costs before it got sucked into the eurozone crisis in July."

He noted that Spain's auction also went well but said Italy's funding challenges are of a "different order of magnitude."

Chiara Cremonesi of UniCredit Research called the auction "extremely positive" and a good omen for a sale of longer-term debt on Friday.

Noting that while demand for shorter maturities has been strong in recent weeks, she said the auction Thursday "was even better than our expectations."

Italy's €1.9 trillion ($2.42 trillion) in government debt and heavy borrowing needs this year have made it a focal point of the European debt crisis.

Italy has passed austerity measures and is on a structural reform course that Premier Mario Monti claims should bring down Italy's high bond yields, which he says are no longer warranted.

Monti took over in November after Premier Silvio Berlusconi stepped down under market and political pressure.

The former EU commissioner said Thursday that Europe needs to focus not only on fiscal discipline, which is to be enshrined in a fiscal compact still being negotiated, but also coordinate measures to promote growth.

Monti said the EU goal of reducing total debt to 60 percent of GDP in 20 years was "severe, but doable."

Italy's debt currently stands at 120 percent of GDP. Spain's is at 66 percent.

Spain's auction was the first since the conservative Popular Party took office last month after its landslide election win Nov. 20. It came a day after Parliament approved the government's first austerity measures, a €15 billion ($19.1 billion) package aimed at reining in the swollen deficit.

Spain has a 21.5 percent unemployment rate and its economy is expected to fall back into recession.

The Treasury sold €4.27 billion in three-year paper with an average interest rate of 3.38 percent. A Dec. 15 three-year bond sale had a 4.02 percent rate. Yields were also down on two other bond types sold.

Marc Ostwald, strategist for Monument Securities described the demand as "very impressive" and said the sale indicated a warm welcome for the government's efforts to quickly bring the deficit under control.

Spain's borrowing costs shot up last year but have eased in auctions since the election.

The country has pledged to slash its deficit from 11.2 percent of GDP in 2009 to within the European Union limit of 3 percent by 2013.

Meanwhile, crucial Greek talks continued between the government and its private investors to reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package.

Finance chief Evangelos Venizelos said Wednesday the negotiations had "advanced and are now at a very good point."

AP

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