Italian debt costs drop on new demand
THE ITALIAN government’s borrowing costs fell to a six-month low yesterday, as investors grew more confident the country’s economy is moving in the right direction.
Support from the European Central Bank’s (ECB) long-term refinancing operation (LTRO) has also helped, increasing Europe’s banks’ liquidity and reducing fears that Italy’s banks are about to collapse.
Italy sold €3.75bn (£3.18bn) of ten year bonds at a yield of 5.5 per cent, down from 6.08 per cent in a similar auction a month ago and 200 basis points below the dangerously high levels seen in November.
It also auctioned €2.5bn of five year bonds at 4.19 per cent, down from 5.39 per cent a month ago.
“The falling yields largely reflect general improvements in Italy’s economy and particularly in its fiscal position,” said Capital Economics’ Jennifer McKeown.
“The LTRO has helped matters, but in an indirect way – investors are more confident that the banking system will not fail, making the government more stable and reducing the chance that the sector will need bailing out.”
Prime Minister Mario Monti was put in government by the EU to slash spending and free up closed sections of the economy including the rigid labour market. Investors have approved of his reforms so far.
The ECB is carrying out a second LTRO today.