Italy scrapes through key bond auction test

(ROME) - Italy scraped through a key bond auction test on Thursday, but Prime Minister Mario Monti called for a European-wide response to the debt crisis that has pushed the eurozone to the brink.

The Treasury raised 7.0 billion euros ($9.0 billion) -- below the maximum sought of 8.5 billion euros but with long-term rates holding below the danger threshold of 7.0 percent which has set off alarm bells around the world.

The rate on bonds due in 2021 was at 6.7 percent -- higher than the level of 5.77 percent for the last similar operation on October 13. The rate on bonds due in 2022, however, was 6.98 percent compared to 7.56 percent in November.

Short-term rates had fallen sharply in another auction on Wednesday.

This week's auctions "went rather well and this is encouraging but we certainly do not think that the phase of financial turbulence is finished," Monti told reporters at an end-of-year press conference.

Monti also stressed that problems for Italy on the markets were linked to wider difficulties on the European level which required a "united, joint and convincing response" that could also boost growth.

Italy's ability to borrow on the market was being closely watched as a test of confidence in the eurozone.

The euro hit the lowest dollar levels in more than a year and 10-year lows against the yen following the auction in a renewed sign of investor concern.

"The bond auction went okay, given what is going on in the eurozone, but almost 7.0 percent for 10-year paper is very high," ETX Capital trader Manoj Ladwa told AFP.

Rene Defossez, a bond strategist at French investment bank Natixis: "There's no reason to be over the moon. We're basically at 7.0 percent.

"We have to remember that next year there is a big, big programme and the conditions for raising it are not necessarily very good," he said.

Italy will have to raise 450 billion euros on the debt markets in 2012 -- with around 53 billion euros to be raised next month -- and analysts say it will struggle if the high rates seen recently persist.

The eurozone's third largest economy, Italy sparked fears this year that its toxic mix of low growth, high debt and spiralling borrowing costs could force it to seek a bailout like fellow eurozone members Greece, Ireland and Portugal.

Silvio Berlusconi's replacement by Monti as prime minister last month has helped ease fears of an imminent debt implosion as the former European Union commissioner quickly put in place a tough plan of austerity measures.

But there is still concern over the plan's impact on an economy that is moving into recession after shrinking by 0.2 percent in the third quarter.

The government is forecasting a contraction of 0.4 percent next year.

There was more bad news on the economic front meanwhile with a closely watched business confidence index falling to 92.5 points in December.

Confidence fell partly steeply for the construction and retail sectors after a Christmas season in which consumption was down compared to last year.

Italy on Wednesday raised 9.0 billion euros in six-month bonds at a rate of 3.251 percent -- half the rate of 6.504 percent that it was forced to pay in November and below the level of 3.535 percent it paid in October.

Analysts suggested that banks making use of low-cost European Central Bank money were largely behind the auction's success, along with the austerity measures adopted this month and aimed at restoring budget balance by 2013.

The ECB last week provided banks with a record 489.2 billion euros in three-year loans at an interest rate of just 1.0 percent.

While the injection was made in order to avoid a credit crunch, the low rate makes it easy for banks to make money off higher-yielding bonds, and analysts have been anticipating the funds may help lower government borrowing costs.

Borrowing costs have spiked to record highs across the 17-nation eurozone in the past few months over fears that economies like Italy could be forced to seek giant international bailouts that would bankrupt Europe.

European leaders have agreed to strengthen rules and sanctions for keeping public accounts in order but there are lingering doubts about the deal and about the impact of an expected slowdown in eurozone growth in 2012.