New Leadership Helps Italian Debt Costs Fall

Italy's cost of borrowing has fallen sharply, after the government raised 9bn euros at half the cost it needed to pay last month.

The interest on six-month debt in the latest bond auction was 3.25% compared to 6.50% at the last similar auction in November.

Demand was strong, suggesting a renewed appetite for Italian short-term debt.

It is thought that the combination of new political leadership, a further austerity budget and an injection of European Central Bank long term money has given some much needed respite to the debt-laden country.

However, all eyes will be on Thursday's auction when Italy goes to market to raise 8.5bn euros of longer-term three and 10 year debt.

The benchmark interest rate on Italian 10-year debt briefly rose above 7% this week, widening the gap between the rate Italy pays on its debt - and that which Germany is charged.

The cost of that debt later fell to 6.8%.

The real test will arrive early next year when Italy has more than 91bn euros worth of debt maturing in the first four months.

Italy's auction results come as data shows that European banks have deposited record amounts of cash at the European Central Bank.

Over the Christmas holiday banks placed nearly 412 billion euros in the ECB's deposit facility.

The funds attract a low rate of interest, suggesting that banks prefer the safety of the central bank over higher returns in the interbank lending market.