Italy's borrowing costs halve - but ECB deposits show distrust among banks

Economic conditions appeared to ease for Italy this week after an auction of bonds saw its borrowing costs slashed.

A nine billion euro (£7.5 billion) auction resulted in short-term borrowing expenses halved today (December 28th 2011), with appetite for Italian debt increasing as a result.

This eases the pressure on its troubled economy slightly and was attributed to a new package of austerity measures, as well as last week's infusion of three-year loans to eurozone banks by the European Central Bank (ECB).

Italy managed to sell six-month bills worth nine billion euros at an average rate of 3.25 per cent, much lower than the 6.5 per cent seen last month.

Also, 1.7 billion euros' worth of two-year bonds were sold at an average rate of 4.85 per cent, compared to 7.8 per cent in November.

Italy has to refinance 327 billion euros of debt in 2012 after building up a deficit of 1.9 trillion euros and being black-listed by other European countries earlier this year.

Another sale of three, six and ten-year bonds is to be held tomorrow.

Despite this positive news the eurozone's economic turmoil has continued this week, with banks stashing 412 billion euros into an ECB deposit facility on Monday amid fears of a eurozone break-up.

The facility only has an interest rate of 0.25 per cent so they are making a loss, but it is seen as a safe haven during times of uncertainty and the banks are using it instead of lending to other financial services providers.

This is sure to worry political leaders after larger-than-expected take-up of ECB loans was witnessed earlier this month.

Experts are concerned that the distrust could lead to a freeze of liquidity similar to that seen in 2008.

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