MacroScope

Italy in market after Spanish downgrade

By Mike Peacock
October 11, 2012

Italy is expected to pay slightly more than it did a month ago to borrow for three years at today’s auction of up to 6 billion euros of a range of bonds. Yields edged up at a sale of 11 billion euros of short-term paper on Wednesday but there is no immediate cause for alarm. Three year-yields have dropped from 5.3 percent to around 3.3 since the ECB declared its readiness to buy the bonds of troubled euro zone sovereigns and Italy has shifted about 80 percent of its debt requirements this year, so is on track in that regard.

The fact that it now seems possible that Mario Monti could continue as prime minister after spring elections can’t do any harm either although yesterday’s surprise cut in income tax muddies the waters a little.

The main problem for Italy is that Spain is in no rush to seek a bailout, a move that would alleviate pressure on Rome too. The IMF kept up the drumbeat of pressure for action in Tokyo, demanding “courageous and cooperative action”, having yesterday said the euro area was still threatened by a “downward spiral of capital flight, breakup fears and economic decline”.  German Finance Minister Wolfgang Schaeuble retorted that Europe was solving its problems and had done far more than appeared to outside observers.

We’ve been reliably told that Germany wants Madrid to hold off for now. Angela Merkel faces an increasingly fractious Bundestag and she wants to go back to it only one more time with one package covering Spain, Greece and maybe bailouts of the small Cypriot and Slovene economies. Today, Merkel meets Hungarian premier Viktor Orban in Berlin.

Given all the mixed messages from the Spanish government it is entirely unclear that it has yet reconciled itself to seeking help, though its debt refinancing numbers still dictate that it will probably have to before the year is out. Overnight, Standard & Poor’s cut Spain to near junk and we’re still waiting for a Moody’s review, due any time, which could well push the sovereign into junk territory. S&P pointedly said the government’s hesitation over a bailout programme raised the downside risks to its rating. It also said tensions with regional governments were diluting policies. Prime Minister Mariano Rajoy may well want to get regional elections in Galicia and the Basque country, due later this month, out of the way before swallowing the bitter pill of outside help.

In Tokyo, IMF chief Christine Lagarde said Greece should be given more time to cut their debt piles. She said the same about Spain and Portugal, though since both have already been given year’s extra leeway, it was not quite clear whether she was advocating yet more time for them. The euro zone and IMF have appeared to be at odds over how to make Greece’s bailout targets attainable but if both are now advocating more time, an agreement could be a step nearer.

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