Italy, Spain easily raise in €28 billion

By Colleen Barry

Associated Press

Published: Thursday, Jan. 12 2012 12:00 a.m. MST

Spain's Prime Minister Mariano Rajoy talks with a party member, not seen, during a plenary session at the Spanish Parliament to approve the new conservative government's first batch of austerity measures, in Madrid, Wednesday, Jan. 11, 2012. Spain's Parliament approved the measures, including income and property tax hikes, aimed at reining in the country's swollen deficit with euro 8.9 billion ($11.5 billion) in spending cuts.

Daniel Ochoa de Olza, Associated Press

MADRID — Spain and Italy gave financial markets a boost Thursday as they successfully raised nearly €22 billion ($27.98 billion) in two keenly watched debt auctions that showed renewed investor confidence in their 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 of the new year.

Both debt-laden countries have been the focus of worries 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 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 expiring at the end of May at just 1.644 percent interest, down from 3.251 percent in the last comparable auction.

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. The country's Ibex stock market index rallied 1.7 percent after the bond sale.

Meanwhile, the two leading European central banks decided to hold their interest rates Thursday, with the European Central Bank keeping its rate at 1 percent and the Bank of England maintaining its lending rate at a record low of 0.5 percent.

The Italian auction showed that European Central Bank efforts to pump liquidity into the financial sector are working, wrote Nicholas Spiro of Spiro Strategy, a London-based consultancy specializing in sovereign risk.

"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."

"This is not just about the amount the Treasury needs to get out the door this quarter, but about perceptions of Italian risk. As long as Italy remains the focal point for investor anxiety about the eurozone, it will remain under pressure at its auctions," Spiro wrote.

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

"While it is true that over the last month the shorter maturities have remained well-bid, so strong demand at this tenor does not come as a surprise, today's auction was even better than our expectations." she wrote.

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.

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.

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