Italy passes bond sale test after rating cut by Moody's

MILAN: Italian banks came to the rescue yesterday after the country suffered a ratings downgrade, but while Rome cut its three-year borrowing costs at auction, a rise in 10-year bond yields highlighted concern it may fall victim to Europe's debt crisis.

Moody's cut Italy's sovereign debt rating to Baa2 yesterday, citing doubts over Italy's long-term resolve to push through much-needed reforms and saying persistent worries about Spain and Greece were increasing its liquidity risks.

Solid domestic demand helped the Italian Treasury sell the top planned amount of 5.25 billion (RM20.37 billion) in bonds, paying less than a month ago on three-year paper.

"This was a challenging enough auction without the downgrade which makes the result look all the more impressive," said Spiro Sovereign Strategy Managing Director Nicholas Spiro.

"Once again, the Treasury was able to get its debt out the door, which right now is the overriding priority."

A new 2015 bond was sold at an average 4.65 per cent rate, compared with the 5.30 per cent Italy paid in June just before a cliffhanger Greek vote that had stoked fears of a euro exit and soon after an unconvincing first deal to help Spanish banks.

Italian banks' commitment to support Rome's refinancing of its 2 trillion (RM7.76 trillion) debt and a broad domestic investor base have provided a safety net for Italy throughout the crisis.

Foreign investors' reluctance to hold Italian debt, however, keeps the yields under pressure. Benchmark 10-year-bond yields were up nine basis points around six per cent while Italy's debt insurance costs also rose.

"Does it mean this puts a cap on the rise in Italian yield?

Well, not really," said strategist Marc Ostwald at Monument Securities in London.

The US rating agency lauded Prime Minister Mario Monti's commitment to fiscal reforms and structural consolidation. But warned it could again cut the country's marks if the next Italian government failed to continue along this path.

"The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population," it said. Reuters