Italy passes market test after downgrade, concern persists

Fri Jul 13, 2012 9:52am EDT
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By Valentina Za and Lisa Jucca

MILAN (Reuters) - Italian banks came to the rescue on Friday after the country suffered a ratings downgrade, but while Rome cut its three-year borrowing costs at auction, a rise in 10-year bond yields highlighted concern it may fall victim to Europe's debt crisis.

Moody's cut Italy's sovereign debt rating to Baa2 on Friday, citing doubts over Italy's long-term resolve to push through much-needed reforms and saying persistent worries about Spain and Greece were increasing its liquidity risks.

Solid domestic demand helped the Italian Treasury sell the top planned amount of 5.25 billion euros in bonds, paying less than a month ago on three-year paper.

"This was a challenging enough auction without the downgrade which makes the result look all the more impressive," said Spiro Sovereign Strategy Managing Director Nicholas Spiro.

"Once again, the Treasury was able to get its debt out the door, which right now is the overriding priority."

A new 2015 bond was sold at an average 4.65 percent rate, compared with the 5.30 percent Italy paid in June just before a cliffhanger Greek vote that had stoked fears of a euro exit and soon after an unconvincing first deal to help Spanish banks.

Italian banks' commitment to support Rome's refinancing of its 2 trillion euro debt and a broad domestic investor base have provided a safety net for Italy throughout the crisis.

Foreign investors' reluctance to hold Italian debt, however, keeps the yields under pressure. Benchmark 10-year-bond yields were up nine basis points around 6 percent while Italy's debt insurance costs also rose.   Continued...

Italy's Prime Minister Mario Monti attends the Allen & Co Media Conference in Sun Valley, Idaho July 12, 2012. REUTERS/Jim Urquhart