Italian and Spanish debt costs fall

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Italian and Spanish debt costs fall

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Italy’s borrowing costs plunged in its first auction of government bonds of the new year on Thursday.

For bonds that have to be repaid next January, Rome paid less than half the rate of interest it had to fork out a month ago — 2.735 percent as opposed to six percent.

The auction, and a similarly successful one in Spain, showed renewed investor confidence in the attempts to address the eurozone’s debt problems with Italy getting help from the European Central Bank and praise from German Chancellor Angela Merkel.

Many Italians are just starting to realise how bad things are.

The comments of Antonello Minceroni in Rome were typical: “I think we weren’t aware of how desperate the situation was, even just a few months ago, so what’s happening now, even if it still looks like a negative scenario, shows at least that there is a possibility of emerging from the crisis.”

But it will take a lot of time and a lot more austerity measures and structural reform.

Meantime Italy has a challenging year ahead on the debt markets as it needs to raise some 450 billion euros.

Thursday’s sale brings a net inflow of 4.3 billion euros, but Italy has to refinance more than 90 billion euros maturing between February and April.

The Spanish Treasury raised 10 billion euros from its auction of three bonds, doubling its target of up to five billion, and yields dropped by about 1.0 percentage point.

Much of the strong results reflected the success, at least for now, of what amounts to a back-door bailout by the European Central Bank, which has lent nearly half a trillion euros of three-year money to banks with a similar offer due in February.

“Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now the market seems very complacent,” said Michael Leister, strategist at DZ Bank in Frankfurt.

With the ECB money borrowed cheaply at just 1.0 percent, banks can buy government bonds with the same maturities from troubled euro zone sovereigns, exploiting the sharp difference in yields.