Italy Sells Debt at Record Yield

Italy had to pay the most in 14 years to sell five-year bonds as Parliament rushes to pass a 30 billion-euro ($39 billion) budget plan that Prime Minister Mario Monti says will bring down record borrowing costs.

The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47 percent, the most since May 1997 and up from 6.29 percent at the last auction on Nov. 14. Demand was 1.42 times the amount on offer, compared with 1.47 times last month.

Monti's Cabinet approved a sweeping budget plan on Dec. 4 aimed at raising revenue and boosting Italy's anemic growth to persuade investors Italy can tame the region's second-biggest debt and avoid a bailout. Parliamentary committees signed off on the amended plan last night, paving the way for a vote this week in the lower house. Monti has warned that failure to approve it could lead to Italy's “collapse” and threaten the survival of the single currency.

“Italy's predicament is dire: it has become a proxy for euro-zone risk at a time when its funding requirements are about to balloon,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mail. “Every bond auction in January and February is going to be scrutinized for signs that Italy is having trouble maintaining market access.”

The euro region's third-largest economy has to repay about 53 billion euros in debt in the first quarter from the region's total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.

The yield on the benchmark 10-year bond was 6.69 percent after the auction at 12:46 p.m. in Rome, up one basis point from yesterday. That pushed the difference with German bonds to 4.69 percentage points. The euro extended its decline against the dollar, trading below $1.30 for the first time since Jan. 12.

Monti, in office less than a month, is seeking to show investors he can bring down borrowing costs and tame a debt that is bigger than that of Spain, Greece, Portugal and Ireland combined. Yesterday, he accepted changes proposed by lawmakers to the plan, which the Senate is due to vote on by Dec. 23 following approval in the Chamber of Deputies.

“We are confident that markets will react positively to the efforts Italy is making, maybe not tomorrow, but the reduction in borrowing costs that we anticipate in the coming months will help spur the economy,” Monti told the Finance and Budget Committees of the Chamber last night in Rome.

Amendments

The package overhauls the pension system, reinstates property taxes on primary residences, raises gasoline levies and seeks to spur economic growth by opening up some professions and offering tax breaks to companies hiring young people and women.

Monti agreed to lawmakers' request to raise the threshold on pensions that will lose cost-of-living increases for the next two years to about 1,400 euros a month, from 936 euros in the original plan. Families paying the new property tax will get a 50-euro credit per child, according to the amendment, and Italians whose checking-account balance averages less than 5,000 euros a year will no longer have to pay a 34-euro annual tax.

The government will cover the lost revenue by increasing the planned levy on Italians who took advantage of previous amnesties on tax evasion. The amendment also adds a tax surcharge on pensions of more than 200,000 euros a year and imposes a levy on property owned by Italians outside of Italy.

Former European Union commissioner Monti, 68, took over last month after Silvio Berlusconi resigned as premier on Nov. 12. Berlusconi's parliamentary majority had eroded as the country's 10-year bond yield surged over the 7 percent threshold that prompted Greece, Ireland and Portugal to seek bailouts.

Bloomberg News

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