Monti calls for more EFSF firepower after bond auction

Italy's prime minister Mario Monti has called for significantly more firepower for the euro zone's bailout fund after a bond auction did little to ease concerns over how the country would finance public spending in the next few months.

Italy's borrowing costs fell from record highs at a bond auction today but cautious investors still demanded a near 7 per cent yield to buy Italian 10-year debt.

The high costs keep intense pressure on Italy, the euro zone's third-largest economy, as it heads towards a refinancing hump early next year. Traders said the European Central Bank stepped into the open market after the auction to buy Italy's bonds in a bid to hold down yields.

An unprecedented ECB injection of nearly €500 billion of cheap funding for banks and a new Italian budget package this month eased pressure at a short-term debt auction yesterday, but longer-dated bonds still pose a challenge.

"Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn't over," Mr Monti said during an end-year press conference. To calm markets further, "most of the work needs to be done in Europe," he said.

He said the European Financial Stability Facility needs "significantly greater" resources but refused to quantify how much more the fund needed.

Italy sold €7 billion of bonds today in thin holiday markets, just above the mid-point of its target range.

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

"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's 10-year yields remained locked above 7 per cent on the secondary market on today, a closely watched threshold that has pushed other euro zone countries to seek bailouts.

Its 3-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 at the end of November.

Since then the ECB has let banks borrow all they sought at its first-ever tender of three-year funds, helping demand for short-term debt.

Italian six-month borrowing costs halved at an auction on Wednesday, following a similarly dramatic drop in Spanish short-term yields on the eve of the ECB's tender.

But there is little evidence that the ECB money has found its way to longer-term bonds of troubled debtors such as Italy.

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

In a push to keep investors buying Italian debt, Mr Monti’s technocrat government outlined plans to tackle Italy's chronic low-growth problems through long-delayed liberalisations.

He said he was preparing measures aimed at cushioning the economic slump, including deregulating labour markets and lowering fuel prices.

Mr Monti said he would present the new measures to its European Union partners at the end of January and made clear he expected more efforts at the EU level towards solving the bloc's debt crisis.

Agencies