Italy's Borrowing Costs Fall

Italy saw its borrowing costs drop significantly on Monday, following the Greek Parliament's approval of another set of austerity measures. Passage of the austerity measures were crucial in order for Greece to receive its next round of bailout funds and to avoid a possible default. European Union leaders had been growing wary of a Greek government that seemed to be dragging its feet about committing to reforms that European Union finance ministers demanded be passed before they would hand over any more bailout money to the Greek government. Italy benefited from the news that the Greek government was able to push through the reforms that are widely unpopular in Greece. Italy successfully conducted a sale of 12 billion euros ($15.9 billion) worth of treasury bills, in which the yield on one year treasury bills fell to 2.23%, down from a yield of 2.735% during the January 12 debt auction. The lower yield seems to be an indicator that the market believes that Italy is much more likely to be able to repay its debts than it was just one month ago. While the auction results could be seen as a vote of confidence in Greece's ability to avoid default, it's worth noting that the austerity measures are violently opposed by many Greeks and that Greece is experiencing another round of protests and riots in opposition to the latest set of austerity measures. The Greek people have suffered through several rounds of austerity measures, which include spending cuts and tax increases, while their economy has fallen into a deep recession. More austerity isn't likely to do the Greek economy much good or improve the lives of lower and middle class Greeks in the midst of a recession. It's quite possible that the Greek government could eventually weaken or even roll back the austerity measures in order to appease an angry electorate. If that were to happen, treasury bill yields could soar for Italy and other troubled Eurozone members like Spain and Portugal. While the auction was successful in terms of borrowing costs being reduced, there was also concern over weakened demand for Italian treasury bills during the latest auction of Italian debt. One explanation that was given for the debt auction's lower than expected demand was that the Bank of Italy experienced technical problems that had a negative affect on the auction's bid-to-cover ratio. There's also the possibility that investors simply had less incentive to buy Italian debt because the yield was so much lower than last month. While many investors took the Greek news well, others who feel that Italian debt is still a gamble may have decided not to take part in the auction because they didn't feel that the lower yield accurately reflected the risks associated with Italian debt. While the short term prospects for Italy might look better because of the results of today's auction, investors should also remember that the Italian economy is performing poorly and could fall into a recession similar to Greece's recession if Italy's own austerity measures end up damaging the economy. If this were to occur, it would send Italy's borrowing costs soaring once again, so it might be a good idea not to read too much into today's results.