Italy Short-Term Costs Halve at Auction to 3.25% from 6.50%

Italian short-term debt costs halved at auction on Wednesday as a new austerity package and cheap long-term liquidity from the European Central Bank won Rome some respite in thin year-end markets.

But analysts warned markets tensions could easily reignite and pointed to a new test on Thursday, when Italy will sell up to 8.5 billion euros of longer-term bonds, including three- and ten-year paper.

On Wednesday, Italy sold 9 billion euros of six-month BOT bills at an average rate of 3.25 percent, down from a euro lifetime record of 6.50 percent at an auction last month.

Demand totaled 1.69 times the amount on offer, versus a bid-to-cover ratio of around 1.5 at the end of November.

http://www.cnbc.com/id/45803237

 

I've been thinking about how many times we've seen the headline ... "successful Italian (or substitute your favorite PIIGS) bond auction," this year ... yet here we are.

In other words, one would do best to either completely ignore or fade like hell the above story. What one should not do is read it and think even the slightest bit of good news occurred this morning.

 

Optimism

 

http://www.ft.com/intl/cms/s/3/57470028-2cca-11e1-b485-00144feabdc0.html#axzz1hje2IwAq

 

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So many meetings, so little achieved. European Union leaders have held no fewer than fifteen summits since the Greek crisis first blew up in 2010. There have been five grand plans and many more incremental proposals. Heads of seven eurozone governments have changed as a direct result of the debt crisis – including the replacement of Italy’s Silvio Berlusconi and Greece’s George Papandreou by the technocrats Mario Monti and Lucas Papademos. Yet the tally of real achievements is deplorably small.

The European Financial Stability Facility was groomed as a €1tn rescue fund for the euro. But its firepower and mandate remain on a tight leash. Eurobonds remain a vague and controversial notion. A voluntary debt swap between Greece and its private sector creditors is elusive. The reluctant but inevitable push for fiscal union is heading into political opposition. True, banks are being pushed to recapitalise, but with such a lack of finesse that assets are flooding the market and lending has stalled. It has been left to the European Central Bank to inject much-needed, but temporary, liquidity.

Contagion marches on, meanwhile. Italy’s 10-year bond yield rose from less than 5 per cent to more than 7 per cent during 2011. True, its borrowing cost fell substantially at an auction on Wednesday. But that was for six-month money. Doubts remain over Italy’s ability to fund itself for the longer term: it has to finance €400bn of maturing debt in 2012. A recession seems inevitable early next year. The eurozone’s economy grew by just 0.2 per cent in the third quarter of this year, with growth in France and Germany offset by weaker peripheral economies. The recession will test the ability of Portugal and Ireland to meet stringent targets set by their bail-outs. And the truly ghastly thought is that there will be another EU summit in January.