Italian borrowing costs drop to 8-year low

Italy's borrowing costs dropped to an eight-year low on Monday, after rating agency's Moody's raised outlook and as the country awaited a new, reform-driven government. On Friday, Moody's raised the outlook for the Italian economy from negative to stable, while holding its notation at  "Baa2". This is a signal that the agency does not intend to lower the rating further in the medium term. In mid-morning trading, the yield or interest rate indicated by trading in existing benchmark 10-year debt bonds fell to 3.651 percent from 3.687 percent late on Friday. This brings substantial relief to public finances from dangerously high rates 18 months ago. The yield, which indicates the interest which Italy will have to offer when it next issues 10-year bonds to finance its public deficit and debt, has now fallen to the lowest level since February 2006. That date was before the global financial crisis, and then the debt crisis which threatened to break up the eurozone and put heavily indebted members such as Italy in severe difficulty. Italy, with the third-biggest economy in the eurozone after Germany and France did not come close to needing a bailout, but confidence fell and its borrowing costs rose close to danger levels. Now confidence has risen, raising demand for the bonds. This has caused the fixed return on the bonds to fall automatically as a percentage of the new, higher price. "The decision by Moody's did not come really as a surprise," said Credit Agricole CIB economist Frederik Ducrozet. But Italy still had "a lot to do" to win an upgrade of its debt rating. The 10-year yield fell against the background of a change of government with the 39-year-old leader of the Democratic Party, and mayor of Florence, Matteo Renzi, set to be asked to form a government Rating agencies generally have taken a more positive line on the eurozone in recent months. - Markets see reforms - This is because there are signs of economic recovery, and because political and financial tensions have eased, notably because of a conditional commitment by the European Central Bank to buy the bonds of countries in trouble. Ducrozet said: "In general, the market is tending to see the glass half full in the eurozone, even with regard to political uncertainty." He said: "The market hopes that Renzi will be rather more flexible" than the party colleague he ousted, Enrico Letta "and there is maybe room for reforms even though the political obstacles are the same." At Credit Mutuel-CIC "investors are reacting positively to this switch of government but the risk of a period of instability and of new elections cannot be overlooked." They said that Renzi "will have the advantage over his predecessors of benefiting from a calmer climate with the country coming out of recession at the end of 2013 and the raising of the country's outlook to stable by Moody's." At Unicredit in London, chief economist Erik Nielsen commented in his weekly review on Sunday that a Renzi government would be "good news" despite uncertainty, and "it is worth noting that his vocal supporters include a very large number of young Italian business people". He added: "I remain confident that the balance of policies will be what Italy needs ... Renzi brings energy, determination to reform Italy, and communication skills to Rome – as well as a democratic and popular mandate to reform."