Italian borrowing costs tick up amid continued debt concerns

Economists forecast Italy's recent GDP contraction to continue into 2012. (Peter Rawlings/Medill)

Italy auctioned off €5.25 billion worth of debt on Monday, issuing 3-year bonds, whose yield ticked uponly slightly from April, as well as longer-term 10- and 13-year bonds, which it had not issued for the last seven months.

The yield on the Italian three-year notes was 3.91 percent, up slightly from the 3.89 percent yield in April’s auction. Longer 10- and 13-year bonds, which are considered riskier given the Eurozone’s uncertain future, produced yields of 5.66 percent and 5.9 percent respectively.

These bonds outperformed those auctioned by the Spanish government Monday—that country’s 10-year notes produced a 6.29 percent yield—suggesting that investors have greater confidence in the Italian government’s ability to repay its loans.

The yields on Italian bonds did continue to creep up following the morning auction however, amid investor concerns about the country’s underlying finances. The yield on Italy’s 3-year bond ended the day at 3.94 percent, while the 10-year bond finished at 5.7 percent.

Italy’s sovereign debt has been hit with a wave of downgrades by all three major ratings agencies in recent months because of concerns about the country’s exposure to the broader European debt crisis and its own domestic budget shortfalls.

When Moody’s in February downgraded the government’s bonds from A2 to A3, it emphasized the need for the Italian government to reduce public spending, stating that it believes “the euro area as a whole possesses considerable economic and financial strength, with its creditworthiness constrained by its institutions and by a legacy of fiscal imbalances rather than by its access to resources.”

In January when S&P imposed its own downgrade it agreed with Moody’s that “deepening political, financial, and monetary problems within the eurozone are exacerbating the external funding constraints on the Italian public and private sectors.”

However S&P also stated that it “believe[s] that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”

Prime Minister Mario Monti has opted to push for fiscal austerity and the Italian government’s borrowing costs have dropped since last November, when he became prime minister. He is pushing for €20 billion in spending cuts and tax increases in the Italian budget, as the country tries to reduce its current €1.9 trillion debt.

It’s hoped that Monti’s efforts would give the government easier access to credit and help stave off a looming recession. Italy’s economy shrank by 0.4 percent in the fourth quarter of 2011, reversing the slight gains of the first three quarters. Economists predict the recent contraction will continue into 2012.

Leave a Reply