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Italy's borrowing rates skyrocket for 2nd day

By Colleen Barry

Associated Press

Published: Monday, Nov. 28 2011 7:40 a.m. MST

European Commissioner for the Economy Olli Rehn, left, is greeted by Italian Premier Mario Monti as they meet at Chigi's Premier palace in Rome, Friday, Nov. 25, 2011. Italy had to pay sharply higher borrowing rates to entice investors to part with their cash during a couple of auctions Friday, in an acute sign that Europe's crippling debt crisis is laying siege to the eurozone's third-largest economy. The auction results are another sign that the country's new technocratic government, faces a big battle to convince that it has a strategy to get a grip on the country's massive debts.

Andrew Medichini, Associated Press

MILAN — Italy's borrowing rates skyrocketed at a bond auction Monday for the second straight business day, as pressure mounted on the eurozone's third-largest economy to come up with quick reforms to keep the euro from breaking up.

The interest rate Italy had to pay to get investors to part with their cash for 12 years soared to 7.20 percent, a full 2.7 percentage points higher than the last similar auction.

In the auction, Italy raised €567 million ($750 million). While there were enough bids to cover the maximum sought of €750 million ($1 billion), the high borrowing rates persuaded the Italian Treasury to stick closer to the lower end of its planned issuance range.

Premier Mario Monti is under enormous pressure to convince markets that his new technocratic government has a strategy to get a grip on its debts and balance the budget by 2013. He is expected to announce additional austerity measures later this week.

A bigger test will come Tuesday, when Italy plans to auction up to €8 billion ($10.6 billion) in debt of three varying maturities, including the benchmark 10-year issues. Last Friday, Italy had to pay sharply higher rates in a pair of auctions, stoking renewed fears that the country is heading toward a potentially devastating debt spiral that could bankrupt the country and potentially bring down the euro.

Driving market fears is the knowledge that Italy is too big for Europe to bail out, and must refinance€200 billion ($267 billion) by the end of April alone.

The bond yields also reflect grim economic data that suggest Italy will be in a recession no later than the first quarter of 2012. The OECD on Monday forecast Italian growth a 0.7 percent of GDP in 2011, followed by a contraction of 0.5 percent next year. That's a sharp cut in previous forecasts of 1.1 percent growth in 2011 and 1.6 percent growth in 2012.

Italian business confidence improved somewhat in November, to 94.4, after hitting a 21-month low of 94.2 last month.

Despite the increase, "it remains very low and alongside other industry-related indicators signal that the economy is facing serious headwinds," said Raj Badiani, an economic analyst at IHS Global Insight.

Earlier Monday, the International Monetary Fund denied reports that it's readying a rescue fund for Italy.

The Italian daily La Stampa reported that the IMF was preparing a €600 billion ($794 billion) bailout fund for Italy, which is struggling to manage its enormous public debt of €1.9 trillion, or nearly 120 percent of GDP.

But an IMF spokesman said there are "no discussions with Italian authorities on a program for IMF financing." And EU spokesman Amadeu Altafaj Tardio also said there have been no such discussion with the European Union.

Italy's banking association, ABI, on Monday inaugurated its first sovereign debt day, during which customers could buy Italian bonds on the secondary market without paying commission. The goal is to create trust in Italian debt — about half of which is in Italian hands — rather than directly influencing borrowing costs.

ABI said it was too early to gauge a response to the promotion announced just Friday, but one bank in Rome said it had three or four takers. Customers can save €2 to €4 euros on every €1,000 invested. Another is planned for the Dec. 12 auction.

"This initiative seems to be positive, but it probably is just a drop in the ocean, because people are very cautious and are waiting to see what will happen," said Giuseppe di Bartolomeo, outside a bank in central Rome.

Monti was appointed earlier this month to replace Silvio Berlusconi, whose fractious conservative coalition squabbled for months over measures to inject growth into the flagging Italian economy.

Monti has pledged a two-track strategy: urgent austerity measures followed by deeper reforms that will be painful for voters to accept. They include revamps of the pension system, doing away with a class of privileged closed professions that discourage competition, cutting political costs, simplifying bureaucracy and selling off state assets.

Monti must obtain approval for the measures from the same Parliament that hamstrung Berlusconi. To make the new austerity more palatable, Monti intends to balance sacrifices from the various political camps — and has promised a spending review of political costs starting with the premier's office.

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Don Melvin contributed from Brussels.

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