Milan

Italy threatened with downgrade, bond rate soars

Interest on 10-year BTP reaches highest level since October

Italy threatened with downgrade, bond rate soars

Milan, February 27 - Italy's borrowing costs soared at a Treasury auction on Wednesday and Moody's threatened to downgrade the country's credit rating after its general election failed to produce a clear winner. Pier Luigi Bersani's centre-left alliance came first in Sunday and Monday's vote but it failed to win a working majority in the Senate. Wednesday's sale of five-year and 10-year BTP bonds was seen as a key test of investor sentiment, with the country at risk of being mired in prolonged political deadlock. The interest rate on 10-year Italian bonds soared to 4.83%, the highest level since October. It was 4.17% at the last equivalent auction in January. The rate on five-year bonds went up to 3.59%, compared to 2.94% at last month's auction. The spread between the 10-year Italian bond and the German benchmark held relatively stable despite the outcome of the auction. The spread stood at 345 basis points at around 12.30 local time, one point higher than its closing level on Tuesday. The spread, a key measure of Italy's borrowing costs, had fallen to 340 before the auction, having gained over 50 points on Tuesday when the election result became clear. Italy was at the centre of the eurozone debt crisis and it looked in danger of plunging into a Greek-style meltdown in 2011 before reforms and austerity measures passed by outgoing Premier Mario Monti's emergency government of unelected technocrats eased the pressure. There are fears that the uncertain situation in Italy could reignite problems for the whole eurozone. Moody's has said the country's credit rating is under threat. "We would consider downgrading Italy's government debt rating in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform," Moody's said. "A deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the euro area debt crisis would also place downward pressure on Italy's rating." Moody's gave Italy's long-term debt a rating of Baa2, two notches above junk status, in July 2012, when it said there were risks that Monti's policies may not continue. Another rating agency, Standard & Poor's, said the election outcome would not immediately affect Italy's sovereign rating, while stressing that it could in the future. Meanwhile, the risk level of Italian bonds, as measured by credit-default swaps (CDS) insuring them, climbed above that of Spain's on Wednesday. The Italian CDS level rose to 291 basis points, compared to 290 for those of Spain, which has also been battling with a financial crisis. The spread between 10-year Italian and Spanish bonds, another measure of investor confidence, remained in Italy's favour, although it dropped to 45 basis points, the lowest level since May 2012.

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