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Mario Monti at a press conference today Pier Paolo Cito/AP/Press Association Images

'Super Mario' encouraged by drop in Italy's borrowing costs

But Italy’s prime minister warned that the turbulence affecting his country and the wider eurozone is not over.

ITALY’S PREMIER MARIO Monti says he’s encouraged by the results of two days of bond auctions which saw Italy’s borrowing costs drop.

But at a year-end press conference today, he said he didn’t consider the market turbulence to be over. Monti said his new government was working intensively on preparing a package of measures to get the Italian economy moving again, which will be presented to EU leaders on 23 January.

He said it would focus on boosting competition and liberalising the labour market. Markets had grown fearful over the past few months that Italy can pay off its debts, which stand at around €1.9 trillion.

Italy saw its borrowing rates fall for the second day running as it raised around €7 billion in a range of auctions today, a further sign that concerns over a default have eased a bit over the past month.

The Bank of Italy said Italy raised €2.5 billion of ten-year bonds at an average yield of 6.98 per cent.

That’s lower than the 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.

However, the country’s borrowing rate on the key 10-year bond remains uncomfortably close to the 7 per cent level widely considered to be unsustainable in the long run.

Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 per cent. In the secondary markets, it continues to hover around the 7 percent mark.

Bond auctions

Markets had grown fearful over the past few months that Italy will find it difficult to pay off its massive debts. Next year alone, Italy has some €330 billion of debt to refinance.

Italy, which is the eurozone’s third-largest economy, also sold €2.54 billion of three-year bonds at an average interest rate of 5.62 per cent, far lower than the 7.89 per cent rate it had to pay last month.

It also raised €803 million in the seven-year auction at a rate of 7.42 per cent and €1.18 billion in nine-year bonds at a yield of 6.7 per cent.

Today’s results come a day after Italy raised €10.7 billion in a pair of auctions, again at sharply lower rates than those it was forced to pay just a month ago.

The sharp decline in Italy’s borrowing costs over the past couple of days suggests that commercial banks from the 17 countries that use the euro may have diverted some money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments.

It may also suggest rising investor confidence in Italy’s recent efforts to reduce its long-term debt through a variety of austerity measures.

Monti’s technocratic government got parliamentary approval last week for more spending cuts and tax increases intended to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of Italy’s bloated pension system.

Yesterday: Stocks slide over signs of jitters at European banks

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