Italy confirms China meeting as debt pressure mounts

Wednesday, 14 September 2011 00:00 -     - {{hitsCtrl.values.hits}}

  •  Tremonti met Chinese officials last week
  •  Italy asked China to make “significant” debt purchases -FT
  • Italy bond yields surge ahead of auction

ROME, Sept 13 (Reuters) - Italian Economy Minister Giulio Tremonti met Chinese officials last week, a Treasury spokesman said on Tuesday after the Financial Times reported that Rome had asked China to buy “significant” quantities of its debt.

The spokesman declined to comment on the substance of the meeting with a delegation that a second source said included the head of China Investment Corp Lou Jiwei and officials in charge of investment and fixed income. There were separate meetings with state investment agency Cassa Depositi e Prestiti.

An Italian auction later on Tuesday of up to 7 billion euros long-term debt including a new five-year bond, plus 2018 and 2020 issues will show if investors have found any reassurance from the reports that China might offer support.

However, similar reports that Beijing was buying peripheral euro zone bonds have not proved conclusive in the past.

“It wouldn’t be the first time the market had hoped that China would ride to the rescue,” Jeremy Batstone-Carr, strategist at Charles Stanley, said. “But the Chinese don’t have a great track record. They participated in the Portugal bonds this year, and they lost money.”

By mid-morning, yields on 10 year Italian BTPs had climbed to 5.6 percent, while the spread over benchmark German Bunds had widened to 397 basis points ahead of the auction of longer term debt.

Italian credit default swaps, an insurance-like instrument to hedge against debt default, hit a record spread of more than 500 bps on Monday.

The Financial Times said on its website that Italy had asked Beijing to make “significant” purchases of Italian debt. The Wall Street Journal reported Italy was hoping China would buy “large amounts” of debt.

Two weeks ago, Italian officials were in Beijing to meet CIC and China’s State Administration of Foreign Exchange (SAFE), which manages the bulk of China’s foreign exchange reserves, the FT said.

CIC is a sovereign wealth fund managing $300 billion.

The Italian Treasury spokesman gave no indication that bond-buying was discussed.

With about a quarter of China’s record foreign currency reserves of $3.2 trillion estimated by analysts to be held in euro assets, Chinese leaders have repeatedly voiced support for the debt-mired single currency area.

Asked to comment on reports of the meetings in Italy, a Chinese foreign ministry spokesman said China had confidence in Europe’s ability to handle its debts.

Premier Wen Jiabao said earlier this month that China retained its confidence in the euro and Europe’s economy but the region’s governments need to ensure the security of Chinese investments there.

Italy has moved to the centre of the euro zone debt crisis amid growing worries about the sustainability of its 1.9 trillion euro debt pile.

Only intervention by the European Central Bank to buy Italian bonds has kept borrowing costs under control in recent weeks but yields have climbed sharply over the past days, suggesting the intervention had done little to change market sentiment.

An Italian emergency could overwhelm existing euro zone bailout mechanisms, and under pressure from markets and the ECB, Rome has presented an austerity package that aims to balance the budget by 2013.

The deficit-cutting measures are expected to be approved by parliament this week but there are widespread fears they could further slow Italy’s already fragile growth.

Prime Minister Silvio Berlusconi promised on Monday that the 54 billion euro package of measures would be approved quickly and without further changes, seeking to calm fears that Italy had lost the will to push through the unpopular plan.

Berlusconi, under pressure from a judicial scandal at home, visits Brussels to explain the package to EU leaders but the bond auction on Tuesday is expected to provide an immediate demonstration of market concern.

Italy’s previous long-term sale at the end of August attracted poor demand for a new 10-year bond, renewing pressure on the country’s bonds on the secondary market.

Wu Xiaoling, a former deputy governor of the People’s Bank of China, told Reuters on Tuesday that investor “panic” about Europe’s debt crisis was unnecessary, and China was ready to work with others to boost market confidence.

“We will continue to support Europe’s measures in maintaining a stable euro,” said Wu, who is now with the National People’s Congress Standing Committee, a law-making body.

Wu, who is not directly involved in China’s foreign exchange investment decision-making, said the international community should provide “tolerance and time” to Italy and other European countries with debt problems “if they have motivations to make changes”.

“But if the country does not show its determination to reform, other countries just won’t help it,” Wu said on the sidelines of a conference.