Spain aid request would help Europe: Italian official

ROME Tue Oct 16, 2012 7:13pm BST

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ROME (Reuters) - A request by Spain for help to lower its borrowing costs would be welcomed by markets and would be good for the euro zone but Italy would not necessarily follow suit, the head of Italy's debt management office said on Tuesday.

Maria Cannata said in a television interview with Sky Italia that from a financial point of view Italy's current 10-year bond yields of almost 5 percent could be maintained indefinitely, noting that the level was low by historical standards.

"The market would interpret it positively," Cannata said when asked about the prospect of Spain requesting help from the euro zone bail out mechanisms.

"I think that in the medium term it would be positive for all of Europe, including us," she said, adding that there was "absolutely not" an automatic connection between a Spanish request for aid and a similar move by Italy.

The current yield gap, or "spread" between Italian benchmark bonds and safer German Bunds does not, in itself, pose a threat to the sustainability of Italy's debt, Cannata said.

However she added that it does increase the cost of credit to business and so undermines the competitiveness of the Italian economy.

Cannata said she hoped and expected that the spread would narrow from the current level of around 340 basis points and said a level of some 200 points was possible in time.

The spread has narrowed from a peak of just over 550 points last November, shortly before unelected Prime Minister Mario Monti took office, but is still far above the levels of below 150 points seen in the years before 2011.

Asked whether Italy could continue to pay yields on its 10 year debt of around the current level of 4.9 percent, Cannata replied: "Certainly."

"It's a historically low level, 4.9 percent. It's not a high level in absolute terms, especially when you consider that inflation is around 3 percent," she said.

The yield on 10-year paper peaked at 7.3 percent in November.

Cannata said the trend was now "very positive" for Italian bonds, and this had been helped by recent announcements by the European Central Bank.

The yields on Spanish and Italian bonds have fallen since ECB President Mario Monti promised to do "whatever it takes" to preserve the euro zone and the ECB offered to buy potentially unlimited amounts of sovereign bonds of countries in difficulty provided they accept certain conditions.

Since August foreign investors have been increasingly buying Italian debt, reversing the previous trend of heavily offloading it, Cannata said.

(Reporting by Gavin Jones and James Mackenzie; Editing by Ruth Pitchford)

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