Italy's borrowing rates fall for 2nd day running

December 29, 2011 - 6:45 AM
Europe Financial Crisis Road Ahead

FILE - In this Dec. 5, 2011 file picture Italian Premier Mario Monti listens to a Senator's speech in Rome. After a turbulent 2011, the 17 countries that use the euro will be quickly confronted in the new year with major hurdles to solving their government debt crisis, just as the eurozone economy is expected to sink back into recession. With government finances under pressure as growth wanes, the eurozone will find it even more difficult to shore up shaky banks and reduce the high borrowing costs that threaten Italy and Spain with financial ruin. As early as the second full week of January, bond auctions in which Italy and Spain need to borrow big chunks of cash will start showing whether the eurozone is finally getting a grip on the 2-year-old crisis that has seen Greece, Ireland and Portugal bailed out. (AP Photo/Gregorio Borgia)

ROME (AP) — Italy saw its borrowing rates fall for the second day running as it raised around euro7 billion ($9.2 billion) in a range of auctions Thursday, a further sign that concerns over a default have eased a bit over the past month.

The Bank of Italy said Italy raised euro2.5 billion ($3.3 billion) of ten-year bonds at an average yield of 6.98 percent. That's lower than the 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.

However, the country's borrowing rate on the key 10-year bond remains uncomfortably close to the 7 percent level widely considered to be unsustainable in the long run. Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 percent.

In the secondary markets, it continues to hover around the 7 percent mark.

Markets had grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around euro1.9 trillion ($2.5 trillion). Next year alone, Italy has some euro330 billion ($431 billion) of debt to refinance.

Italy, which is the eurozone's third-largest economy, also sold euro2.54 billion of 3 year bonds at an average interest rate of 5.62 percent, far lower than the 7.89 percent rate it had to pay last month. It also raised euro803 million in the 7-year auction at a rate of 7.42 percent and euro1.18 billion in nine-year bonds at a yield of 6.7 percent.

Thursday's results come a day after Italy raised euro10.7 billion in a pair of auctions, again at sharply lower rates than those it was forced to pay just a month ago.

The sharp decline in Italy's borrowing costs over the past couple of days suggests that commercial banks from the 17 countries that use the euro may have diverted some money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments.

It may also suggest rising investor confidence in Italy's recent efforts to reduce its long-term debt through a variety of austerity measures.

Mario Monti, Italy's new premier, is holding a press conference Thursday and the state of the economy is likely to feature large.

Monti's technocratic government got parliamentary approval last week for more spending cuts and tax increases intended to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of Italy's bloated pension system.