Monti calls for bigger euro zone stability fund

Fri, Dec 30, 2011, 00:00

ITALY’S PRIME minister has called for an enlarged European bailout fund to help stem the euro zone’s sovereign debt crisis, after an Italian bond auction failed to raise the targeted amount despite unprecedented European Central Bank action earlier this month.

Mario Monti said yesterday that the European Financial Stability Facility (EFSF) needed to be “significantly bigger” but he declined to quantify how much more the fund needed.

He plans to push European partners next month to commit greater resources to this fund.

“Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn’t over,” said Mr Monti at a traditional year-end press conference.

To calm markets further, “most of the work needs to be done in Europe”, he said.

The euro fell to a 15-month low against the dollar after the Italian auction but much of the losses were later recovered.

The ECB has resisted calls for it to intervene more actively by buying the debts of the euro zone periphery directly.

However, it provided €489 billion to European banks earlier this month – the biggest amount loaned in a single operation since June 2009. This nurtured hopes that banks would relend some of these fresh funds to Italy. On Wednesday, a well-received auction of shorter-term bills raised expectations that a more important sale of longer-term bonds yesterday would go well.

While Italy’s borrowing costs fell sharply in the year’s last government bond auction, the closely watched sale raised €7 billion, less than the €8.5 billion targeted.

Bankers said the Italian debt auction had fared well, given the size and the usual end-of-year slowdown in the market, but stressed that the ECB’s bank lending operations would not prove a panacea.

“The hope that the ECB funding would be mostly used to load up on government bonds was probably misplaced,” said Justin Knight, a senior strategist at UBS.

Italy’s 10-year bond yields remained above the crucial 7 per cent mark – the level that pushed Greece, Ireland and Portugal to seek bailouts – after the auction.

Mr Monti said that there was “no justification” for the difference between Italy’s 10-year bond and comparable German debt, a risk premium that stands at more than 5 percentage points.

The increase in this interest-rate differential in December was due to disillusionment among investors over an EU summit that failed to devise a comprehensive plan to end the debt crisis, he said.

The ECB was buying Italian bonds in the secondary debt markets to ease the country’s borrowing costs following the auction as investors remain nervous.

“Buying 10-year Italian bonds is a leap of faith which investors are prepared to take only at very high interest rates,” said Nicholas Spiro of Spiro Sovereign Strategy.

“There are simply too many risks and uncertainties surrounding Italy.”

Italy managed to sell the top planned amount of its 10-year bond but the yield was 6.98 per cent, not far from a euro lifetime record of 7.56 per cent last month.

The country’s three-year bonds sold more easily and their yield fell more than two percentage points at auction to 5.62 per cent – far below the euro era record of 7.89 per cent that Italy paid to sell the same bond in late November.

“The genuine pressure on Italy is still tremendous, despite bold ECB actions that have given [short-term debt] a big boost,” said David Schnautz, a rate strategist at Commerzbank in London.

Italy raised almost €18 billion this week. The sales will settle in January and help towards the treasury’s challenging gross funding target of about €450 billion for next year.

Markets look with concern at €91 billion of Italian bonds falling due between January and April.

– (Financial Times, Bloomberg)