Italy’s Monti warns of ongoing market turbulence
Italy’s borrowing costs fell for a second day Thursday but the country’s new premier said his government has more to do before it convinces financial markets it can manage the heavy debts that have made it the focus of the eurozone crisis.
Mario Monti said he was encouraged by bond auctions at which interest costs demanded by bond investors eased. He said his government of technocrats, in office for just a month and a half following the resignation of Silvio Berlusconi, was preparing a package of measures to get the Italian economy moving again, including efforts to boost competition and liberalize the labor market.
“We absolutely don’t consider the market turbulence to be over,” he said at a news conference after the Italian treasury tapped investors for around euro7 billion ($9.2 billion).
The most keenly awaited result from Thursday’s batch of auctions was the euro2.5 billion ($3.3 billion) sale of ten-year bonds at an average yield of 6.98 percent.
That’s lower than the record 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.
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, Italy’s yield continues to hover around the 7 percent mark.
The 17 countries that use the euro are struggling with a crisis over heavy levels of government debt in several countries. Fears of default on those debts mean that bond investors demand ever higher interest. If a country can no longer borrow affordably to pay off bonds that are maturing, it winds up needing a bailout or defaulting.
Markets had grown fearful over the past few months over Italy’s massive debt burden of euro1.9 trillion ($2.5 trillion). Next year alone, the eurozone’s third largest economy has some euro330 billion ($431 bill.
That means Italy has far to go before it convinces markets it will avoid a disastrous default that could cause another banking crisis and sink the European and global economies.
Italy also sold euro2.54 billion ($3.3 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 ($1.05 billion) in the 7-year auction at a rate of 7.42 percent and euro1.18 billion ($1.54 billion) in nine-year bonds at a yield of 6.7 percent.
Thursday’s results come a day after Italy raised euro10.7 billion ($14 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 tax increases, pension changes and spending cuts.
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.
Economists say the long term problem is the country’s weak growth, since stronger growth both increases tax revenues and shrinks the size of debt relative to the economy. European Central Bank head Mario Draghi has said Italy must undertake deeper economic reforms to improve its economic performance.