Funding costs in Italy hit a new record at an auction on Wednesday as pressure continues to mount in Europe following last week’s EU summit. The summit last week failed to provide the markets with the stability it was looking for.
Italy paid 6.47% to sell five year bonds today while Germany sold their 2 year bonds at a yield of 0.29%. Investors will always favor safety over returns in this market climate. The Euro fell below 1.30 also today as markets fear rating downgrades in euro zone countries.
“Uncertainties on the future of the debt crisis remain high and the market seems to be mainly driven by flight-to-quality this morning,” said Annalisa Piazza, market economist at Newedge Strategy.
Italy has a debt equivalent to 120% of its GDP. Because of this, their borrowing costs have spiraled out of control and many wonder if the country can afford these rates in the long term. Italy has decreased the size of its auctions in recent months due to market pressure, but may have to increase them in the coming months if it is to meet a gross funding goal of 440 billion euros next year.
“The cost of funding will become a crucial factor in the first quarter of 2012, when Italy has to issue 62.5 billion euros of bonds,” said Michael Leister, at WestLB. “For now however, the market is happy with supply being digested.”
“ECB buying in the secondary market will help, but, if the crisis worsens, it is difficult to see how Italy will retain independent market access in 2012 and help from the International Monetary Fund may at some stage be needed,” Citi analysts said in a note.
The ECB has been helping prop up the Italian and Spanish governments in recent months through purchases on secondary markets. Many were hoping for even broader assistance from the ECB, but ECB President Mario Draghi said they would not take further action.