ITALIAN BANKING stocks were hit yesterday after the country’s bond yields rose on concerns over Rome’s plans to auction up to €20 billion of debt this week.
Italy’s UniCredit and Intesa Sanpaolo, whose performances are highly correlated to the country’s bond yields, were the biggest fallers – trading down by 4.8 per cent and 2.4 per cent respectively.
Italy’s benchmark borrowing costs rose above the critical 7 per cent level, which is viewed by market watchers as being unsustainable.
Meanwhile, the euro traded against the dollar at almost its lowest level since January as concerns lingered that Europe’s debt crisis will slow regional growth.
Italy’s bond issues today and tomorrow are the first big market test following the launch of three-year loans for banks by the European Central Bank just before Christmas.
Italy, the world’s third-largest bond market, is seen by many investors as the barometer for the euro zone debt crisis.
It faces a crucial opening to the year with auctions of more than €100 billion in the first quarter alone.
Italy will auction €9 billion of six-month bills and up to €2.5 billion of two-year zero-coupon bonds today.
Tomorrow is slated for a sale of €5 billion-€8 billion of three-year, seven-year and 10-year bonds.
Ahead of the auction, Italy’s benchmark 10-year bond yields inched above 7 per cent in thin trading.
Similar yields forced Greece, the Republic of Ireland and Portugal into international bailouts.
Italy’s borrowing costs have begun to diverge from Spain’s in recent weeks.
Spain’s 10-year yields fell three basis points on Tuesday to 5.35 per cent while Italy’s rose five basis points to 7.03 per cent, according to Bloomberg financial data.
Investors turned on Italy because of its large debt burden which runs to €1.9 trillion and the slow reform progress under the former prime minister Silvio Berlusconi.
However, the recently installed unelected technocratic administration, led by former European commissioner Mario Monti, has failed to stem the escalation in Italian borrowing costs as investors worry about the €350 billion that Rome needs to raise in 2012.
Separately, the European Central Bank said yesterday that financial institutions’ overnight deposits with the bank rose to a record high after it awarded them three-year loans.
Euro area banks parked €411.8 billion with the ECB, the most recorded since the euro’s introduction in 1999.
The European Central Bank last week lent 523 banks a record €489 billion for a three-year period in its latest attempt to maintain a flow of credit to the 17-nation euro economy during the sovereign debt crisis. – (Additional reporting by the Financial Times, Bloomberg and Reuters)
