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Italy sees borrowing costs drop sharply

By Colleen Barry

Associated Press

Published: Thursday, Jan. 12 2012 4:40 a.m. MST

Italian Premier Mario Monti attends a debate at the lower chamber in Rome, Thursday, Jan. 12, 2012. Monti says he would support a new tax on financial transactions so long as it applies to the European Union as a whole. Speaking after meeting Wednesday with German Chancellor Angela Merkel, Monti indicated his preference for such a tax for the whole 27-nation bloc, rather than just the 17 countries that use the euro as their currency.

Gregorio Borgia, Associated Press

MILAN — Italy's borrowing costs dropped sharply in a bond auction on Thursday, when it easily raised €12 billion ($15 million), suggesting investor confidence in the country's financial future is cautiously improving.

In the first bond auction of the new year, investors bought €8.5 billion in 12-month bonds at a yield of 2.735 percent, sharply down from last month's rate of 5.95 percent and well below the record of 6.087 reached in November when concerns about Italy were at a high.

Italy also sold €3.5 billion in bonds expiring at the end of May at just 1.644 percent interest, down from 3.251 percent in the last comparable auction.

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. Fitch Ratings Agency, which has said it will consider whether to downgrade Italy's credit rating by the end of the month, estimates Italy needs to borrow €360 billion ($458 billion) this year.

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.

Analysts said the auction reflects an improvement in market sentiment, as well as the impact of the European Central Bank's program to buy bonds on the secondary market.

Sovereign debt analyst Nicholas Spiro, of the London-based consultancy Spiro Strategy, cautioned it was early to say "that Italy has turned a corner," noting that short-term bonds are easier to sell than longer term debt.

Market reaction was good, however. In the secondary market, where issued bonds are then traded openly, Italy's bond yields fell sharply on Thursday, indicating greater investor confidence in the country's financial situation. The yield on the benchmark 10-year bond dropped to 6.6 percent from around 7 percent, a perilous level that forced other eurozone nations to seek bailouts.

Monti, who took over in November after Premier Silvio Berlusconi stepped down under market pressure, told Parliament on Thursday that Italy would assert itself to play a central role in European decisions on resolving the crisis.

The former EU commissioner said 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. Monti also said that Italy would seek to avoid "rigid limitations and new sanctions beyond what exist."

He expressed hope that the new treaty on fiscal discipline, which would need to be ratified by eurozone countries, would help the European Central Bank "feel more relaxed," an indirect reference to the ECB's program of buying bonds of weaker countries to keep their borrowing rates down.

The ECB has kept its bond-buying program limited, saying it is up to governments to win lower interest rates by cutting deficits and improving growth.

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