* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates price action, adds comment, chart)
By Dhara Ranasinghe
LONDON, April 14 (Reuters) – Italy’s two-year bond yields rose on Tuesday to their highest in almost a month, reflecting some disappointment in markets over a half-trillion-euro coronavirus rescue plan agreed by euro zone finance ministers late last week.
The agreement includes almost unconditional use of the euro zone’s European Stability Mechanism (ESM) bailout fund for loans to governments, a scheme to subsidise wages so that companies can cut working hours rather than jobs, and a plan for the European Investment Bank to step up lending to companies.
Italian Prime Minister Giuseppe Conte on Friday criticised the deal, saying making available cheap loans from the euro zone bailout fund was a “totally inadequate tool” and Italy had no intention of applying for help from the ESM.
Analysts said the measures helped peripheral bond spreads near term, but without meaningful steps towards fiscal union longer term, upward pressure on the borrowing costs of weaker states would return.
“Italian spreads reflect disappointment that Italy might not use the ESM facility,” said Antoine Bouvet, senior rates strategist at ING.
“There is a stigma attached to using the ESM facility — it doesn’t play well on the domestic scene. Also, we had these headlines with big numbers, but the ESM part is worth a small amount.”
Italy’s two-year bond yield rose around 24 basis points to almost 0.90% — its highest level since March 18 — when it spiked to just above 2% before bond buying by the European Central Bank calmed a panicked market.
Ten-year Italian bond yields were 10 bps higher at 1.70% . The gap over German Bund yields was at 200 bps — more than 10 bps wider than levels seen late Thursday before European markets closed for the long Easter weekend.
Germany’s benchmark Bund yield was flat at -0.34% .
The euro zone deal, announced just before the Easter break, did not mention using joint debt to finance recovery, an approach favoured by Italy, France and Spain but opposed by Germany, the Netherlands, Finland and Austria.
European Commission Vice President Valdis Dombrovskis told the German newspaper Handelsblatt the EU could finance a recovery fund worth up to 1.5 trillion euros ($1.64 trillion) with bonds guaranteed by member states.
“With little sign of joint-issuance, Italy still looks fragile in the long-term,” analysts at Mizuho said in a note.
Analysts added that without further steps towards fiscal unity, investors would increasingly differentiate between the bloc’s weaker and stronger members — creating upward pressure on the borrowing costs of highly-indebted states such as Italy. “Fundamentally, the structural problem of solvency has not been resolved. The Italian debt should explode beyond 150%,” said Nicolas Forest, global head of fixed income at Candriam.
“Eurobonds are being postponed and without debt pooling the solvency of peripheral debts will remain a problem for the next few years.”
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