Italy has returned to the bond markets, but there was relatively weak demand for the 7.7 billion euros worth of bonds it sold.
That was despite the European Central Bank buying Italian debt in recent weeks to bring down the amount of interest – yields – Rome has to offer.
The bond sale came as the Italian government backtracked on parts of its austerity package and the Bank of Italy predicted growth this year of less than one percent.
The rise in yields, which nonetheless stayed well below levels hit before the European Central Bank began buying Italian debt three weeks ago, raised questions about the sustainability of Rome’s funding efforts and threw the focus on to a Spanish bond auction on Thursday.
Traders said the ECB stepped in after the auction to buy significant amounts of 10-year Italian debt, halting the rise.
The auction will do little to alleviate the market’s central fear that Italy, seen as too big to be bailed out, will not be able to issue bonds at an affordable level to finance its huge 1.9 trillion euro debt burden. Italy must still sell up to 90 billion euros in bonds this year and ECB purchases have been steadily decreasing.
At the same time as the bond auction, Italy’s central bank said a weak economy threatens government efforts to contain the country’s debt mountain.
Ignazio Visco, deputy director-general of the central bank, said growth was likely to be under one percent in 2011 and even weaker in 2012 and warned that market tensions remained high.
“We risk a phase of stagnation, which would slow the decrease in the debt burden,” Visco told a Senate committee.
On Monday Italy modified its austerity plan, scrapping a tax on high earners and scaling back cuts to local authority funding. The package has caused serious tension in the centre-right coalition.
A government statement contained little detail on how the government would make up for revenue lost due to the changes. The 45.5 billion euro austerity package now making its way through parliament which is aimed at balancing the budget by 2013.
The package was passed in parliament this month to try to stem weeks of market turbulence that threatened to suck Italy into a Greek-style financial crisis.
It was agreed after heavy pressure from the European Central Bank.
But it has been criticised by groups ranging from employers’ federation Confindustria to the main unions, the opposition and even significant sections of the ruling coalition itself and is certain to be amended in the coming weeks.
And central bank deputy director-general Visco said changes to the austerity package must include measures to boost growth in the euro zone’s third largest economy: “Balancing the budget has to be combined with economic policy aimed at reviving prospects for growth in our economy.”