MILAN (AP) – Italy's borrowing rates skyrocketed during bond auctions Friday, initally battering stock markets in Europe as the continent's escalating debt crisis laid siege to the eurozone's third-largest economy.
Italy's new government, under economist Mario Monti, is struggling to convince investors it has a strategy to reduce the nation's $2.6 trillion worth of debt.
Friday's auction results are also likely to fuel calls for the European Central Bank to use more monetary firepower to cool a rapidly overheating financial crisis.
Amplifying investor fears is the knowledge that Italy is too big for Europe to bail out, as it has done with smaller nations like Greece, Portugal and Ireland. Italy must refinance $200 billion by next April alone, but too-high borrowing rates have the potential to fuel a devastating debt spiral that could bankrupt the country.
Friday's auctions showed just how risky investors view Italian debt. The country paid an average yield of 7.8% to raise $2.7 billion in two-year bills — sharply higher than the 4.6% it paid in an October auction.
And even raising $10.7 billion for six months proved exorbitantly expensive, as the yield for those notes spiked to 6.5%, nearly double the 3.5% Italy paid in October.
Following the grim auction, Italy's borrowing rates in the markets shot even higher, with the 10-year yield spiking a third of a percentage point to 7.3% — above the 7% threshold that forced other European nations into bailouts. Monti took power just a week ago, and hopes are dashed that investors would give him a bit of a honeymoon are dashed.
"Mario Monti has failed so far to impress bond markets he has the power and authority to do what is required," said Louise Cooper, markets analyst at BGC Partners.
At least for Friday though, light but mostly upbeat trading in a shortened session on Wall Street helped European markets recover from earlier losses.
Still, Italy was not the only member of the 17-nation eurozone to have a disappointing auction this week. Even Germany — the region's strongest economy and the main funder of eurozone bailouts — failed to raise all the money it sought Wednesday, its worst auction result in decades.
Spain also saw its borrowing rates ratchet sharply higher, even after a landslide victory for the conservative Popular Party, which has made getting a reduction in Spain's borrowing levels its top priority.
European debt crisis contagion also hit Hungary and Belgium Friday. Moody's Investors Service downgraded Hungary's sovereign debt to junk status, a decision that the government hotly criticized.
Hungary is not a member of the eurozone, but trades with many eurozone members. Meanwhile, Standard & Poor's ratings agency downgraded long-term Belgian debt a notch, citing a threat to its exports.
Italy's Monti continues to emphasize his intention to balance Italy's budget by 2013, and he plans to introduce "fair but incisive" structural reforms," his office said following a Cabinet meeting Friday.
Monti also has pledged to cut government spending with pension system reform, reimpose a tax on homes annulled by Berlusconi's government, reduce tax evasion, streamline civil court proceedings, and to get more women and youths into the work force.
Olli Rehn, the EU's monetary chief, said Friday that Italy's economic fundamentals are "solid" and he praised Monti's economic reforms as "going in the right direction," but he added that more action is needed.
Monti's medicine — budget rigor and growth measures while fairly distributing the social pain — are "the right ones," Rehn said after meeting in Rome with the Italian leader. "I fully endorse them."
But he told Italian lawmakers that they must implement the reform measures quickly.
"Over the longer term, productivity will depend on a well-educated labor force," Rehn said. "I am particularly concerned about high unemployment, which is a tremendous waste of talent that Europe simply cannot afford."
The week's developments have ratcheted up pressure on the ECB to step up its bond purchases in the markets, though Germany remains adamantly opposed. The current program is designed to keep a lid on borrowing rates by purchasing bonds in the open market.
So far, the ECB has bought limited amounts of bonds and then sold an equivalent amount of assets. The ECB said Monday it bought bonds worth $6 billion last week, down from $12.7 billion worth a week earlier.
Potentially, the ECB has unlimited financial firepower through its ability to print money. Many countries in the eurozone, including France, want the bank to act more decisively to solve the debt crisis.
However, Germany finds the idea of monetizing debts unappealing, warning that it lets more profligate countries off the hook for their bad practices.
usatoday.com
Italy's new government, under economist Mario Monti, is struggling to convince investors it has a strategy to reduce the nation's $2.6 trillion worth of debt.
Friday's auction results are also likely to fuel calls for the European Central Bank to use more monetary firepower to cool a rapidly overheating financial crisis.
Amplifying investor fears is the knowledge that Italy is too big for Europe to bail out, as it has done with smaller nations like Greece, Portugal and Ireland. Italy must refinance $200 billion by next April alone, but too-high borrowing rates have the potential to fuel a devastating debt spiral that could bankrupt the country.
Friday's auctions showed just how risky investors view Italian debt. The country paid an average yield of 7.8% to raise $2.7 billion in two-year bills — sharply higher than the 4.6% it paid in an October auction.
And even raising $10.7 billion for six months proved exorbitantly expensive, as the yield for those notes spiked to 6.5%, nearly double the 3.5% Italy paid in October.
Following the grim auction, Italy's borrowing rates in the markets shot even higher, with the 10-year yield spiking a third of a percentage point to 7.3% — above the 7% threshold that forced other European nations into bailouts. Monti took power just a week ago, and hopes are dashed that investors would give him a bit of a honeymoon are dashed.
"Mario Monti has failed so far to impress bond markets he has the power and authority to do what is required," said Louise Cooper, markets analyst at BGC Partners.
At least for Friday though, light but mostly upbeat trading in a shortened session on Wall Street helped European markets recover from earlier losses.
Still, Italy was not the only member of the 17-nation eurozone to have a disappointing auction this week. Even Germany — the region's strongest economy and the main funder of eurozone bailouts — failed to raise all the money it sought Wednesday, its worst auction result in decades.
Spain also saw its borrowing rates ratchet sharply higher, even after a landslide victory for the conservative Popular Party, which has made getting a reduction in Spain's borrowing levels its top priority.
European debt crisis contagion also hit Hungary and Belgium Friday. Moody's Investors Service downgraded Hungary's sovereign debt to junk status, a decision that the government hotly criticized.
Hungary is not a member of the eurozone, but trades with many eurozone members. Meanwhile, Standard & Poor's ratings agency downgraded long-term Belgian debt a notch, citing a threat to its exports.
Italy's Monti continues to emphasize his intention to balance Italy's budget by 2013, and he plans to introduce "fair but incisive" structural reforms," his office said following a Cabinet meeting Friday.
Monti also has pledged to cut government spending with pension system reform, reimpose a tax on homes annulled by Berlusconi's government, reduce tax evasion, streamline civil court proceedings, and to get more women and youths into the work force.
Olli Rehn, the EU's monetary chief, said Friday that Italy's economic fundamentals are "solid" and he praised Monti's economic reforms as "going in the right direction," but he added that more action is needed.
Monti's medicine — budget rigor and growth measures while fairly distributing the social pain — are "the right ones," Rehn said after meeting in Rome with the Italian leader. "I fully endorse them."
But he told Italian lawmakers that they must implement the reform measures quickly.
"Over the longer term, productivity will depend on a well-educated labor force," Rehn said. "I am particularly concerned about high unemployment, which is a tremendous waste of talent that Europe simply cannot afford."
The week's developments have ratcheted up pressure on the ECB to step up its bond purchases in the markets, though Germany remains adamantly opposed. The current program is designed to keep a lid on borrowing rates by purchasing bonds in the open market.
So far, the ECB has bought limited amounts of bonds and then sold an equivalent amount of assets. The ECB said Monday it bought bonds worth $6 billion last week, down from $12.7 billion worth a week earlier.
Potentially, the ECB has unlimited financial firepower through its ability to print money. Many countries in the eurozone, including France, want the bank to act more decisively to solve the debt crisis.
However, Germany finds the idea of monetizing debts unappealing, warning that it lets more profligate countries off the hook for their bad practices.
usatoday.com
No comments:
Post a Comment