Italy’s banks facing higher funding costs

Tim Wallace
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STANDARD & Poor’s downgraded 24 Italian banks and financial institutions last night, citing renewed “market tensions” and lower growth prospects.

It also raised the risk assessment on Italy’s banking industry from group 2 to group 3, which could prompt higher borrowing costs.

Meanwhile jittery investors moved out of French bonds yesterday. The move was prompted by Moody’s announcing on Monday that it may place France’s AAA credit rating on downgrade watch in coming months if the cost of funding the Eurozone bailouts costs too much.

The warning pushed 10-year French bond spreads over German bunds up 18 basis points (bps) to 114bps, its highest since 1992.

Finance minster Francois Baroin said that France may not meet 2012’s 1.75 per cent GDP growth forecast. Nonetheless, he maintained that the country’s rating was solid.

Elsewhere, Germany’s ZEW indicator of economic sentiment decreased by five points in October. The eighth consecutive monthly fall brings the index down to minus 48.3 points, its lowest in three years. This suggests a soft recession is likely.

A Spanish auction of €1bn of 18-month Spanish debt yesterday saw yields fall on those seen in September, down to 3.801 per cent from 3.807. Greece sold €1.625bn of three-month treasury bills at 4.61 per cent – up five bps on last month’s sale.