Italy borrowing rates drop again in bond auction

[January 13, 2012]  ROME (AP) -- Italy saw its borrowing costs drop for a second day in a row Friday as it easily raised euro4.75 billion ($6.05 billion) in a bond auction that indicated improved investor confidence in the country's financial future and the 17 countries that use the euro.

The auction caps a rare week of good news in the Europe which on Thursday saw a successful bond auction in Spain and the European Central Bank's president, Mario Draghi, announcing that he had spotted "tentative signs of stabilization" in the European economy and that the ECB had prevented a serious credit contraction in the euro area with a massive injection of cheap funds in December.

However investors and markets recognize that, while some progress has been made this week, a long haul to full European economic recovery lies ahead.

Investors demanded an interest rate of 4.83 percent to lend Italy three-year money, down from an average rate of 5.62 percent in the previous auction and far lower than the 7.89 percent in November, when the country's financial crisis was most acute.

While Italy paid a slightly higher rate for bonds maturing in 2018 which were also sold in Friday's auction, demand was between 1.2 percent and 2.2 percent higher than what was on offer.

However, the results were not as strong as those of bond auctions the previous day, when Italy raised euro12 billion ($15 million) and Spain saw huge demand for its own debt sale.

Marc Ostwald, strategist at Monument Securities, said the results were disappointing compared with the successful bond auctions on Thursday.

"Overall, it underscores that while all the auctions in the eurozone have been battle victories, the war is a long way from being resolved (either way)," he said in a note. "These euro area auctions will continue to present themselves as market risk events for a very protracted period."

Italy's euro1.9 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 would consider whether to downgrade Italy's credit rating by the end of the month, estimates the country needs to borrow euro360 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.

Analysts have said the successful recent bond auctions were at least in part the work of the ECB, which has inundated banks with cheap loans, giving them ready cash that at least some appear to be using to buy higher-yielding short-term government bonds.

Some 523 banks took euro489 billion in credit for up to three years at a current interest cost of 1 percent.

Banks may also be buying up government bonds to use as collateral so they can tap another unlimited offering of three-year ECB credit to banks that is to be handed out on Feb. 29.

That factor could fade after the February credit allotment, however, said Rabobank analyst Jane Foley.

But use of the 3-year ECB loan money could mean that "the implications are more positive for the periphery and successful peripheral debt issuance is likely to last longer," she said.

Peter Schaffrik, head of European rates strategy for RBC Capital Markets, said the ECB had helped scale back fears prevalent late last year of an imminent European financial collapse.

"A good deal of credit should be assigned to the ECB, which has been, and will be, we argue, supporting the European financial system, its sovereigns, and to some degrees the European economies via significant liquidity injections and lower rates," Schaffrik wrote in a note to investors.

[Associated Press; By NICOLE WINFIELD]

David McHugh in Frankfurt contributed.

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