Italian Borrowing Costs Surge
Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome's new emergency government.
The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.
Though Italy managed to raise the full planned amount of 10 billion euros, weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market.
Yields on two-year BTP bonds soared to more than 8 percent in response, a euro lifetime high, despite reported purchases by the European Central Bank.
In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7 percent threshold, over which Italy is likely to need outside help if they do not subside.
"The pricing is awful," said Padhraic Garvey, rate strategist with Dutch bank ING in Amsterdam. "The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."
Investors' attention will now turn to a bond sale of up to 8 billion euros that Italy is planning for next Tuesday.
"For the BTP auctions next week, we'll have more of the same they'll probably get it done at a concession," Garvey said.
Italy's new technocrat government, which took power last week, is at work on structural reforms to revive the stagnant economy but markets are looking for quick and effective responses from European policymakers, such as a greater involvement of the European Central Bank.
Traders said the ECB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its reluctance to prop up high-debt euro zone governments, its bond-buying programme has been conducted intermittently, and never powerfully enough to provide more than short-term stability.
New Bank of Italy Governor Ignazio Visco said short-term measures to tame Italy's budget deficit would not be enough to solve the country's economic problems and only structural reforms will generate growth.
At an annual average rate of just 0.3 percent over the past decade, the Italian economy has grown faster than only a handful of other countries across the world. Real purchasing power has fallen 4 percent in 10 years.
BIG SPRING DEBT BILLS
Since being thrust to the fore of the euro zone crisis in July, Italy has always managed to attract sufficient demand at its auctions.
But record high yields threaten Rome's planned gross issuance of 440 billion euros for 2012 as interest payments on the country's 1.9 trillion euro debt pile rise.
Analysts say that, at current yield levels, the euro zone third-largest economy risks losing market access as redemptions totalling a massive 150 billion euros for the February-April period approach.
The euro, already trading around a seven-week low, inched down after Friday's auction. European stock markets remained in negative territory for the day with the Milan stock-market the worst performer.
The six-month yield nearly doubled from an auction level of 3.5 percent a month ago.
By comparison, Spain paid 5.2 percent to sell six-month paper at a much smaller short-term auction earlier this week, after elections handed power to an austerity-committed conservative government.
Italy also sold 2 billion euros of zero-coupon CTZ bonds at a euro era record high yield of 7.8 percent, up from 4.6 percent at the previous sale.