Italy hit by high borrowing rates despite patriot bond drive

28th November 2011, Comments 0 comments

Italy was hit by high borrowing rates on Monday despite a patriotic drive to get Italians to buy bonds, after warnings from France and Germany that Rome's debt crisis could sink the eurozone.

Italy raised 567 million euros ($759 million) in bonds indexed to eurozone inflation due in 2023 but the rate jumped to 7.3 percent from 4.6 percent for the last similar operation and the amount raised was below the top range expected.

Italian banks meanwhile waived their fees on bond purchases for a day in a special initiative aimed at propping up a market that has been sliding for months amid concern over Italy's 1.9-trillion-euro ($2.5-trillion) debt.

Long-term borrowing costs have shot up as high as 8.0 percent and in a sale on Friday rates surged to 6.504 percent on six-month bonds and to 7.814 percent on two-year bonds indicating deep investor unease over Italy's prospects.

Leading business people, students and even footballers declared they would take part in Monday's initiative entitled "BTP Day" ("Bond Day") but there appeared to be little take-up among ordinary people in Rome and Milan.

"I was expecting a lot of movement but until now there's been little demand as far as I know," said Francesco Montuori, the manager of a branch in central Rome of Intesa Sanpaolo, Italy's largest retail bank.

Many people did not know about the initiative despite ample media coverage in recent days, with only one man, 50-year-old Marco saying as he walked into the bank: "Yes, I heard about it but I'm not interested."

Bank customers in Milan said it seemed like a good initiave but they did not have the means to invest in bonds.

Europe meanwhile was again in turmoil after Moody's ratings agency warned that every member of the European Union could have its credit rating downgraded without firm action to stem the eurozone debt crisis.

The OECD in Paris also warned that the eurozone crisis was now one step away from plunging advanced economies into recession and even depression, with waves of bankruptcies and wealth destruction in Europe.

The OECD analysis comes amid reports, denied by the IMF, that Italy has been seeking a 600-billion-euro ($800 billion) bailout, and a recognition by Germany and France that an Italian debt default would kill the euro.

The money would give Monti a window of 12 to 18 months to implement urgent reforms "by removing the necessity of having to refinance the debt," Italian daily La Stampa reported on Sunday, citing IMF officials.

The report said the IMF would guarantee rates of 4.0 percent or 5.0 percent on the loan -- far better than the borrowing costs on commercial markets.

Italy needs to refinance about 400 billion euros in debt next year.

The Organisation for Economic Cooperation and Development, a policy forum for 34 advanced economies, forecast that the Italian economy would grow by just 0.7 percent this year and shrink by 0.5 percent next year.

The European Commission earlier this month forecast that Italian output would rise by just 0.1 percent in 2012.

The Italian government is forecasting growth of 0.6 percent next year.

© 2011 AFP

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