Italy borrowing costs hit record 7%

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Italy's cost of borrowing has touched a new record, a day after Prime Minister Silvio Berlusconi said he would resign once budget reforms are passed.

The yield on Italian 10-year government bonds reached 7%, the highest since the euro was founded in 1999.
The debt was pushed up as a clearing house asked for a larger deposit to trade Italian bonds - to cover the increased risk of non-payment.
Investors fear that Italy could become the next victim of the debt crisis.
LCH Clearnet, a clearing house for buying and settling debt, has asked for a larger margin, or deposit, for trading debt of the eurozone's third-biggest economy.
Separately, the make-up of Greece's new government is expected to be announced.
Stocks fall The rate of 7% is considered by most investors as unsustainable. The higher the yield - the implied cost of borrowing - goes for Italy, the more likely it is that the country's huge economy will need to be bailed out - something that the eurozone has been desperately trying to avoid.
Italy has to roll over more than 360bn euros (£309bn) of debt in 2012.
The BBC's business editor Robert Peston said: "No one wants to lend to a country when that country would use the loan to pay the interest on previous loans - that's throwing good money after bad."
On Tuesday, Mr Berlusconi said that he planned to resign after won a budget vote, but did not succeed in getting an absolute majority in the lower house of parliament.
After rising in early trade, stock markets in Europe fell back.

Continue reading the main story

“Start Quote

When the implicit interest rate rises to that kind of level, investors know that a country with big debts can't afford to repay what it owes”

Robert Peston Business editor, BBC News

• Peston: Italy nearer the precipice

Italian stocks were lower, while the benchmark German and French stock indexes were flat.

French banks, which are heavily exposed to Greek debt, continued to rally.
Shares in BNP Paribas rose 2.2%. Societe Generale gained 2.1% and Credit Agricole rose 1.8%.
On Tuesday, SocGen reported that quarterly profits had fallen by 31% because of a 60% write-off on its Greek loans.
Greece, which has been bailed out twice and is undergoing painful austerity cuts, also looks close to forming a new government.
In some good news, record exports pushed the trade surplus of Germany - Europe's largest economy - to a three-year high in September, data showed on Tuesday.

Debt crisis: live

Italian bonds rise past 'unsustainable' 7pc barrier and the country enters bail-out territory, with the ECB reportedly buying country's debt and IMF chief warning that the global economy faces the risk of a 'lost decade'.

 

Eurozone bond spreads and the levels at which countries asked for bail-outs 

By Andrew Trotman

10:33AM GMT 09 Jan 2011

6307 Comments

This page will automatically update every 90 secondsOn Off

• Italian 10-year bonds pass 7pc, ECB 'buying nation's debt'
• IMF's Christine Lagarde warns of economic 'lost decade'
• Greece pledges to announce new leader today
• Barroso: all EU members should be members of euro
• Berlusconi to step down after key austerity vote
• Chinese inflation falls sharply to 5.5pc

Latest

10.33 Italian yields hit 7.4pc, this is surely game over for Italy now.

10.32 Jeremy also explains why this increase in the cost of trading Italian bonds by LCH Clearnet is hurting bonds even more - it pushes up the cost for Italian banks buying the government's debt, according to Barclays Capital figures:

@jeremywarneruk #BarCap calculates #LCH increase in margin requirements will double cost for Italian banks to €8bn.

That's a lot of extra money to find.

10.29 Plenty of voices explaining why this further leg-up in Italian bond yields is bad news. From Jeremy Warner, Telegraph commentator:
@jeremywarneruk It's pretty much game over for Italy now. IMF will be in before the end of the year.
10.12 With the bond yield rising now to 7.2pc, Reuters is reporting that the European Central Bank has been buying 10-year bonds in an effort to reduce this interest rate.
10.05 With Italian 10-year bonds breaching the 'unsustainable' 7pc level, there is evidence that the euro crisis is worsening. Italy will find it very hard to borrow money because of this rate of interest.
More investors are avoiding Italian debt because of fears they will not be able to pay it back, causing the bond yield to rise - now past 7pc, which most economists agree could mean Italy requires a bail-out to continue functioning.
See the chart below, which shows the size of the gap between the borrowing costs of various EU nations and Germany.
When the gap between Germany's borrowing costs and those of Greece, Ireland and Portugal were at the levels Italy's are heading for, those three countries all ended up with bail-outs:

10.03 Paul Volcker, US economist, believes the euro crisis is an issue of confidence...

So nothing to do with the potential trillions of euros of debt?
09.53 BREAKING NEWS
Greece to announce new PM at noon GMT.
09.46 BREAKING NEWS
Italian 10-year bonds have breached the 'unsustainable' 7pc level. BBC's Robert Peston tweets:
Bailout almost inevitable - but eurozone's bailout fund is too small.
09.39 UK trade figures have been released by the Office for National Statistics. The UK’s deficit on seasonally adjusted trade in goods and services was £3.9bn in September compared with the deficit of £2.7bn in August.
09.20 Over in Greece - no, we haven't totally forgotten about that other euro disaster area - there has still been no announcement of who the new Prime Minister will be.
A decision was initially due to be made by midday in Athens yesterday, and has now been promised for today.
As time goes on, Lucas Papademos finds his star is waning. Greek news reports said yesterday had definitely got the top job. But he's no longer a definite and now Vassilios Skouris, the head of the European Court of Justice, is in the running.
It's lucky Greece has so many Brussels big-wigs to draw on - Mr Papademos is a former vice president of the European Central Bank.

^{Lucas Papademos was yesterday a shoo-in to be Greek PM but now doubts are growing.}
09.10 Italian 10-year bond yields are up again to 6.82pc after Barclays says Italy is "mathematically beyond the point of no return".
It's a bit technical but it's important - as we reported at 07.19, the deposit charge for investors trading Italian 10-year government bonds has been increased to 11.65pc from 6.65pc - meaning if you want to trade the bonds you have to put down a lot more money to do so, a key risk indicator.
So as well as uncertainty about the forthcoming change in the Italian government and whether Berlusconi's replacement will be able to instill more confidence in markets, traders are also going to be put off dealing in Italian bonds because it's going to cost more to do so.
The BBC's Robert Peston tweets:
@Peston Serious for Italy @lindayueh #LCH Clearnet raises deposit charge on 10YR #Italy bonds to 11.65% from 6.65%, concerns about security of debt
09.03 Watch IMF chief Christine Lagarde speaking in Beijing this morning and warning the world that we could be heading for a "lost decade":

08.58 The cost for Italy to finance its debt mountain has eased slightly after hitting a euro-era high on opening.
The yield on 10-year bonds stands at 6.751pc, but this remains exceptionally high and the rate even rose slightly to a new record of 6.787pc in the first deals.
Berlusconi's resignation last night removes some uncertainty about progress on application of a new round of tough measures to strengthen public finances in Italy, the third-biggest economy in the eurozone.
Italian and German 10-year yield spread widens to 500 basis points.
08.44 In his morning email, Daily Telegraph Deputy Editor Benedict Brogan points out that:
Across the channel, economic Armageddon continues. Alhough markets have rallied on the news Berlusconi is to step down, Europe's crisis is far from over.
As we note in our leader , there is wishful thinking "that Berlusconi is the very personification of the Italian problem", but actually it goes much deeper: "Even if a perfect government of national unity were to be installed, it would not address the underlying difficulty, which is not really Italian resistance to reform, but the euro itself."
08.35 HSBC shares have been hit this morning. Bank's Q3 figures show pre-tax profits have doubled year on year to $7.2bn. However, strip out the debt valuation adjustment and pre-tax profits were down $1.6bn at $3bn.
08.12 Today's poll:

08.07 The FTSE 100 is showing signs of promise. It's up 0.4pc (23 points) at 5591. Italian MIB is up 1pc - they like the fact that Silvio has gone.
08.06 The French economy is set for zero growth in the last quarter of the year, the Bank of France has warned, just two days after the country's government announced a new round of austerity measures.

Meanwhile, the budget ministry said that the central government budget deficit, a component of the overall deficit, had fallen by €30bn at the end of September on a 12-month basis to €92.7bn, owing to a big fall in spending and a slight rise in revenues.
08.02 Italian 10-year bonds have hit a new euro-era high of 6.787pc at the open. They rose yesterday after the PM lost his majority in the parliament.
08.01 The Greeks have promised to reveal their new unity government at some point today, but talks are rportedly hitting a hurdle over EU demands on a rescue package.
Political leaders failed on Tuesday to name a power-sharing coalition and new prime minister after the conservative opposition rejected EU insistence that a new government agrees to the terms of the massive bailout in writing.
07.52 The BBC's Today show has this morning broadcast an interview with Jose Manuel Barroso, president of the European Commission:
All members of the European Union should be members of the euro. It's an obligation. So this debate about having two different entities is absurd. All euro member states have a legal, not political, obligation to join the euro area. It's a complete mistake to make it two separate entities. That would be the beginning of the end of the European Union.
07.41 Moody's has put Lloyds on review for a downgrade over the upset caused by CEO Antonio Horta-Osorio's absence.

Not what the City needs right now.
07.31 Silvio Berusconi, who last night revealed he will be resigning from his post as Italiam PM, has reportedly told a newspaper he will not run for office in next elections. He added that there is no alternative to early elections and sees Italians voting in February.
07.24 A quick piece of corporate news: Kesa Electricals will sell the Comet chain to Hailey for just £2. Kesa will invest £50m in the business and retain Comet’s pension liabilities. The chain has come under pressure from budget-conscious consumers and internet shopping.
07.21 Dexia, the European bank that had its Belgian unit nationalised, has lost €4.07bn on the sale of the unit and wrote down Greek debt and related derivatives by €2.32bn. It added that shareholder equity shrank 84pc.
Ouch!
07.19 LCH Clearnet has raised the deposit charge on Italian 10-year bonds to 11.65pc from 6.65pc.
07.11 A quick round-up of corporate news in the UK, lots of interesting results out this morning:

Sainsbury's: H1 pre-tax profit rises 6.6pc to £354m, like-for-like sales up 1.9pc.
Flybe: profits jump 75pc in six months to September 30 to £14.3m.
Scottish and Southern Energy: annual profits fall 25pc to £287.4m.
07.08 Chinese inflation has fallen sharply to 5.5pc.
07.06 Fiatcurrency on Twitter tweets about the Chinese inflation data out this morning:
China October inflation data: CPI and PPI inflation both came down as expected, leaving more room for policy loosening.
06.57 Yesterday was all about Italy, today Greece has promised to reveal who will be the country's next PM.
I could get used to all this decisive action...
06.42 A quick look at the front pages of the daily newspapers today. Unsurprisingly they are leading on Silvio Berlusconi's decision to step down.
The Telegraph: The party's over: Silvio Berlusconi to step down
FT (£): Berlusconi pledges to resign
Guardian: In the end it was the euro that got him... Berlusconi forced out
Times (£): Berlusconi resigns with stab at Roman treachery
06.40 We're off and running with the news already today!
International Monetary Fund chief Christine Lagarde says the global economy faces the risk of a "lost decade" of little or no growth due to financial instability and Asian economies should take steps to guard against the impact of a downturn.
Lagarde said Asian economies are relatively strong but need to be "prepared for any storm". She said Asian governments that have tightened monetary policy to fight inflation should "pause a little bit".
06.15 Good morning and welcome back to our live coverage of the continuing global debt crisis. Log on throughout the day for the latest news and views.
Read all our latest news on the financial crisis, or take an in-depth look at events over the past month.

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