Italy scrapes through key bond auction test

ITALY scraped through a key bond auction test yesterday, but Prime
Minister Mario Monti called for a European-wide response to the debt
crisis that has pushed the eurozone to the brink.

The Treasury
raised ?7 billion (RM28.77 billion) - below the maximum sought of
?8.5 billion but with long-term rates holding below the danger
threshold of 7.0 per cent which has set off alarm bells around the
world.

The rate on bonds due in 2021 was at 6.7 per cent -
higher than the level of 5.77 per cent for the last similar operation
on October 13. The rate on bonds due in 2022, however, was 6.98 per
cent compared to 7.56 per cent in November.

Short-term rates had fallen sharply in another auction on Wednesday.





This week's auctions "went rather well and this is encouraging but we
certainly do not think that the phase of financial turbulence is
finished," Monti told reporters at an end-of-year press conference.

Monti also stressed that problems for Italy on the markets were
linked to wider difficulties on the European level which required a
"united, joint and convincing response" that could also boost growth.

Italy's ability to borrow on the market was being closely watched as a test of confidence in the eurozone.

The euro hit the lowest dollar levels in more than a year and 10-year
lows against the yen following the auction in a renewed sign of
investor concern.

"The bond auction went okay, given what is
going on in the eurozone, but almost 7.0 per cent for 10-year paper is
very high," ETX Capital trader Manoj Ladwa said.

Rene Defossez, a bond strategist at French investment bank Natixis:

"There's no reason to be over the moon. We're basically at 7.0 per cent.

"We have to remember that next year there is a big, big programme and
the conditions for raising it are not necessarily very good," he said.

Italy will have to raise ?450 billion (RM1.85 trillion) on the debt
markets in 2012 - with around ?53 billion to be raised next month - and
analysts say it will struggle if the high rates seen recently persist.

The eurozone's third largest economy, Italy sparked fears this year
that its toxic mix of low growth, high debt and spiralling borrowing
costs could force it to seek a bailout like fellow eurozone members
Greece, Ireland and Portugal.

Silvio Berlusconi's replacement
by Monti as prime minister last month has helped ease fears of an
imminent debt implosion as the former European Union commissioner
quickly put in place a tough plan of austerity measures.

But
there is still concern over the plan's impact on an economy that is
moving into recession after shrinking by 0.2 per cent in the third
quarter.

The government is forecasting a contraction of 0.4 per cent next year.

There was more bad news on the economic front meanwhile with a
closely watched business confidence index falling to 92.5 points in
December. AFP