On Thursday Italy will auction 8.5 billion euros of 3 year, 7 year, and 10 year bonds. Buying longer term Italian debt is less enticing for institutions compared to shorter term Italian bonds which are less risky.
Yesterday Italy sold 9 billion euros ($ 11.6 billion) of shorter term 6 months debt at an average interest rate of 3.25% which is roughly half the 6.504% rate that Italy paid to sell bonds last month. Two year bond yields fetched 4.853 % , down from 7.814 % last month.
Last week Italy’s Prime Minister Mario Monti played a critical role in helping Italy’s government to pass a 33 billion euro austerity package consisting of government cuts and tax increases.
Italy will soon be faced with repaying 161 billion euros in maturing debt from February-April 2012.
Last week the European Central Bank (ECB) responded to growing concerns about EU banks having liquidity problems and offered 489 billion euros up to 3 years at interest rates around .75%.
There were 523 banks that accepted the ECB’s new cash infusion or “quantitative easing by the back door” on Friday. The banks cautiously kept the new cash on reserve at the ECB where it earns .25% interest instead of loaning the new ECB money to other banks for a higher interest rate.
In early December the European Banking Authority decided to increase capital requirements for European banks by 114.7 billions and many EU banks are now greatly concerned about meeting those increased capital requirements.On Monday EU banks showed little risk appetite and deposited a record amount 412 billion euros at the ECB, surpassing the 384 billion euros record amount from June 2010.
Yesterday the euro dropped below 1.30 following some concerning news in the market such as reports that banks are facing pressure with collateral requirements. The ECB balance sheet also grew to a record 3 trillion, which signals the ECB’s growing exposure to the Euro zone’s debt crisis. The ECB is faced with having to continue its policy “quantitative easing by the back door” for EU banks until countries such as Italy, Portugal, Greece can somehow manage to grow their economies in the midst of widespread austerity measures and GDP contraction.