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« Stephen Leeb: Expect $5 Gas, $60 Silver & $3,000 Gold in 2012 | Main | A simple plan to keep your assets safe from an out-of-control government »
Thursday
Dec292011

Euro slumps to 15-month low as Italian bonds sales worry markets

THE euro crashed to a 15-month low against the dollar yesterday as concerns over Italy weighed heavily on the markets, even though Rome survived a €7 billion (£5.9bn) auction of long-term debt, according to The Scotsman

In what marked the last sale of eurozone government debt this year, the Italian treasury pulled through several bond auctions – including a closely watched sale of ten-year debt.

Although borrowing costs were lower yesterday than at an equivalent auction last month, investors felt the 6.98 per cent yield on ten-year debt was still too close for comfort to the 7 per cent level that is widely considered to be unsustainable.

In Rome, new prime minister Mario Monti welcomed this week’s debt sales but acknowledged that the country was narrowly scraping through. “We absolutely don’t consider the market turbulence to be over,” he said, adding that the country’s recently-formed government of technocrats was preparing another package of measures to pull its economy out of the mire.

He indicated that reforms would include proposals to increase competitiveness and flexibility in the employment market and a crackdown on property tax avoidance.

Repeating a phrase previously used by Italy’s central bank chief, the Italian prime minister said: “You lose market confidence easily; you get it back with constant and continuous efforts.”

On Wednesday, Rome also managed to borrow money on a medium-term basis at a significantly lower rate than in November. Nevertheless, investors remain deeply concerned as the country faces refinancing a staggering €300bn of debt in 2012. Raj Badiani, senior economist at IHS Global Insight, said: “Investors are still waiting for more progress on the reform front to ensure Italy can improve its muted growth and productivity performance since the adoption of the euro.”

The €7bn raised yesterday was also shy of the €8.5bn maximum the Italy treasury said it had hoped to fetch.

Greece, Italy and Portugal were all forced to go cap in hand to the European Union and International Monetary Fund when the interest rates on their ten-year debt exceeded 7 per cent.

Italy survived a November auction of ten year-debt, which saw yields hit a record 7.56 per cent, but economists are wary that Rome’s stay of execution could soon come to an end. The eurozone is widely tipped to slump into recession in 2012, which will do little to help governments such as Monti’s that are seeking to reverse weak growth.

However, it was a good day for Chancellor George Osborne, who was warned before Christmas that Britain may be in danger of losing its prized AAA status. Yesterday morning, yields on UK gilt dropped to a record low of 1.962 per cent.

David Miller, partner at Cheviot Asset Management, said: “The gilt market has not been driven by valuations but by sentiment, so the rise in purchases is a partial vote in favour of the UK.

“Overall market movements this year have shown Britain to be a beacon of sanity in Europe. We have a stable government with a plan to reduce the deficit, an empowered central bank, and a floating currency. This is not a bad combination for surviving difficult times.”

Global equity markets advanced despite the mixed news from the eurozone, but the woes over Italy saw the euro hit a fresh low against the dollar at $1.2866. The next test for Italy and Spain – another embattled economy considered “too big to bail” – will come in the second full week of January when both will once again need to borrow large chunks of cash.

Bailed-out Greece also faces the challenge early in the new year of striking a deal with creditors on a debt write-down that will cut the value of their holdings by 50 per cent.

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