MILAN (Reuters) - Italian short-term debt costs halved at auction on Wednesday as a new package of budget austerity and an injection of cheap long-term money from the European Central Bank won Rome some respite in thin year-end markets.
Analysts warned market tensions could easily reignite and pointed to a new test on Thursday when Italy will sell up to 8.5 billion euros ($11.1 bln) of longer-term bonds, including three- and ten-year paper.
But the average rate of 3.25 percent at which Italy sold 9 billion euros of six-month BOT bills was down from a euro lifetime record of 6.50 percent just a month earlier.
"Many things have changed from a month ago: the government has won a confidence vote on its austerity package and the ECB has acted to help banks," an Italian bill trader said.
"This doesn't mean we can rule out further problematic auctions. Markets are easily unnerved."
Demand for bills totaled 1.69 times the amount on offer, a clear improvement versus a bid-to-cover ratio of around 1.5 at the end of November.
This is the first Italian debt sale since the ECB provided 490 billion euros in cheap three-year loans to euro zone banks on December 21 in an unprecedented move aimed at easing credit strains.
Expectations of a strong take-up at the ECB's tender contributed to an equally dramatic fall in Spanish short-term borrowing costs this month.
Madrid's six-month debt costs more than halved to 2.4 percent at an auction on the eve of the ECB's tender.
However, doubts about how much of the cheap three-year funds would find their way into troubled government bonds weighed on Italian and Spanish yields in the following sessions.
Italy's ten-year yields briefly climbed back above 7 percent this week, pushing the premium over the equivalent German benchmark above 500 basis points.
On Wednesday, the yield stood at 6.8 percent, giving a premium of 489 basis points over Germany.
Credit Agricole strategist Peter Chatwell said the results bode well for the auction of three-year bonds on Thursday but he was less sure about the 10-year sale - typically a better measure of underlying interest from external investors.
"Demand for short term paper is good. It remains to be seen whether this extends to the longer maturities," he said.
Italy paid a euro lifetime record high yield of 7.56 percent to sell ten-year bonds at the end of November.
Italy can count on key support from retail domestic investors at short-term sales but longer-term bonds remain more challenging. With more than 91 billion euros of bonds maturing in the first four months of 2012, Rome faces a crucial test early next year.
In a push to regain market confidence, in the run-up to Christmas Italy's parliament gave the final seal to an emergency austerity budget rushed through by a new technocrat government.
Market attention will now turn to the reform agenda of Prime Minister Mario Monti who has promised to tackle Italy's chronic low-growth problems -- after inaction by former PM Silvio Berlusconi pushed the country to the brink of financial disaster.
Monti has convened a cabinet meeting on Wednesday to outline his plans and he could provide some indications to investors in his traditional year-end press conference on Thursday.
Analysts expect Monti's 33 billion euro austerity package to further depress Italy's weak internal demand, making government's efforts to revive growth through a series of long-delayed liberalizations even more crucial.
Italy also sold on Wednesday 1.7 billion euros of 24-month, zero-coupon CTZ bonds at an average yield 4.85 percent, sharply down from 7.8 percent a month ago.
For the first time, the Treasury set a target range for the CTZ sale, as it does for other bonds. It gives a set amount for bill auctions.
The Treasury had planned to sell between 1.5 billion and 2.5 billion euros of CTZs. ($1 = 0.7654 euros)
(Additional reporting by William James in London)
Copyright 2011 Thomson Reuters. Click for Restrictions.
Eurozone crisis liveblog:
12/30/2011 5:29 PM EST
Global Stock Markets Lost 12 Percent Of Value, Or $6.3 Trillion, In 2011
Investors in global stock markets lost $6.3 trillion in wealth in 2011 largely because of fears of a eurozone breakup, according to The Financial Times. The value of global stock markets fell 12 percent to $45.7 trillion.
From the FT:
The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 per cent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 per cent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.
Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 per cent this year, Hong Kong’s Hang Seng index 20 per cent and the Shanghai Composite 22 per cent.
12/30/2011 2:08 PM EST
Subsidy Cut Threatens Italy's Newspapers
Up to 100 Italian newspapers will be forced to close after the Italian government slashes subsidies to newspapers in the name of shoring up its finances, according to The Financial Times.
The subsidy cut amounts to a 69 percent cut in funding for newspapers, according to the FT. It was ordered by the government of the previous prime minister, media magnate Silvio Berlusconi, and approved by the new government of Mario Monti. Though the newspaper industry is in decline, some say that these local and sometimes partisan newspapers give voice to stories that the mainstream media ignores, according to the FT.
Staffers at the communist daily Liberazione, which has 5,000 readers, are staging an occupation of the newsroom this weekend to prevent the owners from shutting down the paper after its possible last issue is released on Saturday, the FT reports.
12/28/2011 10:28 AM EST
Investors Unmoved By Lower Borrowing Costs For Italy
Investors were unmoved by the steep fall in Italy's short-term borrowing costs on Wednesday, as Italy's long-term borrowing costs stayed elevated and European stocks fell.
The interest rate on Italy's six-month government bonds fell by half to 3.25 percent at an auction on Wednesday: a vote of confidence in Italy's ability to pay off its debts for half a year.
But investors remained skeptical about Europe's long-term economic prospects. The DAX in Germany plunged 1.04 percent on Wednesday, the CAC in France fell 0.38 percent, and Italy's FTSE Italia All-Share neither gained nor lost ground. The interest rate on Italy's ten-year government bonds remained unsustainable at 6.80 percent.
12/28/2011 10:08 AM EST
EU Admits That Austerity Will Lead To Higher Youth Unemployment
The European Commission admitted in a report in mid-December that its medicine for the sovereign debt crisis may be poison for Europe's long-term economic outlook.
The report said, according to The Wall Street Journal, that the imminent economic slowdown in Europe, caused in part by a contraction in government spending, will worsen job prospects for young people, and "young people remain the hardest hit by the crisis and its aftermath." The report added that "income shocks may prove permanent."
The youth unemployment rate in the European Union is disastrously high at 20 percent, with a high of 48 percent in Spain, according to the WSJ.
12/28/2011 10:05 AM EST
European Safe Haven Deposits Reach All-Time High, Again
The European sovereign debt crisis is turning into a banking crisis.
After breaking a record just a day earlier, the amount of overnight deposits parked at the European Central Bank's overnight deposit facility reached another record high on Tuesday: $591 billion, a 10 percent increase from $538 billion the day before, according to The Wall Street Journal.
The deposits attract an interest rate of just 0.25 percent and could translate into a loss for banks, highlighting the rising level of banks' distrust in any risky lending as banks seek to shore up capital to meet new regulatory requirements.
12/27/2011 3:27 PM EST
Italy Suffers From Worst Christmas Shopping In Ten Years
Italy suffered from the worst Christmas shopping season in ten years, according to the Italian consumer group Codacons, Bloomberg News reported.
Italians spent $62.75, or 48 euros, less per person during the holidays this year than the average of the past five years, according to Codacons.
Shoe and clothing stores suffered the most, with sales in that sector plunging 30 percent compared to previous years, according to Codacons.
As the Italian government seeks to rein in its debt by slashing spending and collecting more in taxes, Italians are cutting back in their spending, which will continue to hurt the economy. Italy's latest austerity plan will cost every Italian family about $1,476, or 1,129 euros, according to the Italian consumer group Federconsumatori, Bloomberg News reported.
The FTSE Italia All-Share, Italy's main stock index, fell 0.85 percent on Tuesday.
12/27/2011 10:18 AM EST
European Safe Haven Deposits Reach All-Time High
Banks parked a record high number of deposits in the European Central Bank's overnight deposit facility, which is considered to be a safe haven, according to The Wall Street Journal.
Banks deposited $538 billion, or 412 billion euros, overnight at the ECB on Monday, up 19 percent from $453 billion, or 347 billion euros, on the Thursday before Christmas, according to ECB data cited by the WSJ.
The high level of overnight deposits reflects the rising level of distrust in inter-bank lending, in conjunction with continued liquidity in the eurozone markets as the ECB lends more to banks, the WSJ noted.
12/27/2011 9:55 AM EST
French Unemployment At 12-Year High
The number of people without jobs in France reached a 12-year high in November, placing pressure on French President Nicolas Sarkozy's reelection campaign, according to Reuters.
France's labor ministry reported that the number of registered jobseekers in France rose to 2.85 million, 1.1 percent more than in October and 5.2 percent more than during the same period last year, according to Reuters.
The unemployment rate in France rose in the third quarter to 9.3 percent from 9.1 percent in the second quarter, according to France's national statistics office, Reuters reported.
12/27/2011 9:39 AM EST
Post-Christmas Shopping Boosts European Stocks
The stock prices of European retailers rose after reports of shoppers flooding stores both in Europe and the United States on Monday, the day after Christmas, according to The Financial Times.
The stock price of German retailer Metro rose 1 percent on Tuesday, France's Carrefour rose 0.6 percent, and Swiss watchmakers Swatch and Richemont rose 0.7 percent, according to the FT.
The DAX stock index in Germany rose 0.23 percent, while the CAC 40 in France fell just 0.03 percent.
12/20/2011 2:11 PM EST
EU Rolls Out Plan To Combat Youth Unemployment
In the face of growing youth unemployment across Europe, the European Commission has launched what it calls the Youth Opportunities Initiative, a program aimed at getting more of the continent's young people into the workforce.
Per a press release from the European Commission, the program will allocate 4 million euro toward getting young people into employment, education or training within four months of leaving school.
At the moment, the EU has a youth unemployment rate of about 21 percent, meaning that 5 million young people are out of work. According to the European Commission, a total of 7.5 million people age 15 to 24 are not employed, attending school or involved in work training.
The lack of opportunities for Europe's young people has inspired protests and riots in some countries and mass migrations in others. The problem is expected to grow worse if Europe tips into a recession, or if the EU's many heavily indebted countries impose austerity measures to rein in deficits.
-- Alexander Eichler