Rates plunge in Italian bond auction

Italy paid sharply lower rates on Wednesday to raise 9.0 billion euros ($11.8 billion) in a six-month bond sale as tensions over the eurozone's third economy eased after its tough austerity plan. The rate was 3.251 percent -- half the 6.504 percent paid for a similar operation on November 25 and also lower than the 3.535 percent on October 26. The Treasury also raised 1.733 billion euros with zero coupon bonds due in 2013 at a rate of 4.853 percent, compared to 7.814 percent last month. Investors hailed the auctions with stocks in Milan up 1.24 percent. Italy has spooked international markets this year with its slow growth and a sharp rise on its borrowing costs raising fears of an imminent blow-up of its giant debt -- equivalent to 120 percent of gross domestic product (GDP). Silvio Berlusconi's replacement by Mario Monti as prime minister in November has helped calm nerves although there is still concern about the impact on the economy of a draconian plan of tax increases and pensions adopted this month. The rate on 10-year bonds has reached as high as 8.0 percent this year -- far above a level seen as sustainable -- and the European Central Bank has been forced to intervene with massive purchases of bonds on the secondary market. With Wednesday's sale and a scheduled sale on Thursday of between 5.0 billion and 8.0 billion euros of bonds maturing in three, seven and 10 years, Italy will have raised around 430 billion euros this year on the debt markets. In 2012 it will have to raise 450 billion euros -- a target seen as challenging but possible by analysts, especially if rates fall further. This week's auctions have "the task of closing with a positive note a horrible year for Italian bonds," business daily Il Sole 24 Ore said. Neil MacKinnon, an economist with VTB Capital bank, said: "Italian debt accounts for a significant portion of total eurozone funding in the first quarter, and the ECB will have to step up its bond purchases." The government has said it is planning a raft of measures to help stimulate the economy starting next year -- including a liberalisation of notoriously protectionist professional associations like taxi drivers and pharmacists. Monti is also planning an overhaul of labour market legislation to make it easier to fire people -- a move that opponents say will sharply increase the unemployment rate but supporters say will actually help encourage hiring. Another major plan is a large-scale privatisation programme, which according to Corriere della Sera daily could cut debt by 100 to 150 billion euros. The government is forecasting economic contraction of 0.4 percent in 2012.