BBC News - Italy borrowing costs fall sharply at auction

The cost of borrowing faced by the Italian government has fallen sharply at its latest debt auction.

Nicola Marinello Glendevon King Asset Management says "waters are much calmer now for Italy"

The government raised 9bn euros ($11.8bn, £7.56bn) in short-term debt at half its previous interest rate.

The interest on the six-month bills was 3.251%, down from 6.504% at the last similar auction in November.

The auction follows the extension of 489bn euros in three-year loans to eurozone banks by the European Central Bank (ECB) last week.

It was the first time the ECB had agreed to lend banks money for longer than one year, and has led to speculation that the new cash may be used by banks to lend to their respective governments.

Of the 489bn euros, some 300bn euros was used by banks to refinance their own existing debts, leaving about 190bn euros in spare cash to invest elsewhere, including in government debt.

Austerity

Also on Wednesday, the Italians raised a further 1.7bn euros in two-year debt at an interest rate of 4.85%, down from 7.81% last month.

The auctions follow the introduction of further austerity measures and other reforms in Italy by the government of Prime Minister and economist Mario Monti, which have reassured the markets.

Among these reforms was a cap on the size of cash payments - designed to crack down on tax evasion.

"The [ECB loans] reduced the possibility of a credit crunch, so banks don't have to reign in all the liquidity they have, so that may have helped," said Marco Stringa, senior economist at Deutsche Bank. "What the Monti government did in December definitely helped."

Market boost

Italy has significant borrowing needs in the new year, including 161bn euros in debt repayments falling due between February and April, all of which it will have to refinance through new borrowing.

The implied cost of borrowing on longer-term Italian debt traded in the market fell sharply on the news, with the 10-year bond yield down to 6.74% by mid-morning on Wednesday.

But yields rose back above 7% later in the day. This is an unacceptably high rate for the government to borrow at when it needs to go back to the market to refinance its existing debts.

The Italian government is due to issue long-term debt on Thursday, including 10-year bonds.