ROME – Strong demand for short-term Italian government debt on Wednesday pushed the country's borrowing costs lower and suggested investors have become less jittery about an imminent default by the eurozone's third-largest economy.
Italy raised euro10.7 billion ($14 billion) in a pair of auctions at sharply lower rates than those it was forced to pay just a month ago when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.
The sharp decline in Italy's borrowing costs could be a signal that commercial banks from the 17 countries that use the euro diverted some of the money they tapped from emergency loans from the European Central Bank last week to buy the bonds of heavily indebted governments. It may also suggest rising investor confidence in Italy's recent efforts to reduce its long-term debt through a variety of austerity measures.
The Bank of Italy said the average yield on its euro9 billion ($11.8 billion) six-month bill offering was 3.251 percent, half the 6.504 percent rate it had to pay at the equivalent auction last month. And an auction of two-year bonds, which raised euro1.7 billion ($2.2 billion), also saw the yield fall to 4.853 percent from 7.814 percent last month.
"This is an encouraging development, suggesting that the Italian sovereign debt market has pulled back from the dangerous situation in late November," said Raj Badiani, a senior economist at IHS Global Insight.
"The calmer environment reflects the passing of additional austerity measures and some welcome progress on the structural reform agenda, coupled with the ECB's decision to provide additional cheap financing to Italian banks," Badiani added.
After initially cheering the auction results, sentiment in markets deteriorated sharply in risk-averse trading following a weaker than anticipated performance on Wall Street.
While Italy's FTSE MIB fell in line with other stock markets, the euro slid to $1.2938, its lowest level since Jan. 11 and the yield on Italy's benchmark ten-year bonds pushed back towards the 7 percent mark that is widely considered to be unsustainable in the long-run. Further insights into the level of demand for Italy's ten-year bonds will emerge in an auction Thursday.
Italy is the eurozone's third-largest economy and is considered too big to save under the eurozone's current bailout funds. Markets have grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around euro1.9 trillion ($2.5 trillion). Next year alone, Italy has some euro330 billion ($431 billion) of debt to refinance.
Mario Monti, the country's new premier, got parliamentary approval last week for more spending cuts and tax increases intended to save the country from financial disaster. One of the most controversial aspects of the austerity package is reform of Italy's bloated pension system.
As well as possibly indicating increased confidence that Monti's efforts will keep the country's finances on a sustainable path, Wednesday's auctions could also have been supported as well by a large infusion of credit to eurozone banks last week from the European Central Bank. A week ago, 523 banks took the opportunity to swell their coffers by euro489 billion ($639 billion), the largest ECB loan operation in the 13-year history of the euro.
There has been speculation that the stronger banks might use the cheap, long-term loans — on which the current interest rate is 1 percent — to purchase government bonds that carry higher interest rates and profit from the difference.
That could support both government and bank finances. But it would run contrary to efforts by many banks to lower their exposure to bonds issued by heavily indebted governments.
While some banks may be using the money they got from the ECB to buy up government debt, many others appear to have opted for a much safer option — depositing their new cash back with the central bank. Figures Wednesday showed eozone banks parked a record euro452 billon ($591 billion) overnight at the bank Tuesday, surpassing the previous record of euro411.80 billion set only Monday.
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AP Business Writer David McHugh contributed from Frankfurt, Germany.

NEW ORLEANS – When the Federal Emergency Management Agency mailed out 83,000 debt notices this year to victims of Hurricane Katrina and other 2005 storms, one of the letters showed up in David Bellinger's mailbox. Bellinger, who is blind, needed a friend to read it and break the news that FEMA wants him to pay back more than $3,200 in federal aid he received after Katrina.
"I nearly had a stroke," recalls the 63-year-old, who moved to Atlanta after the storm wrecked his New Orleans home. "I'm totally blind. I subsist entirely on a Social Security disability check. If I have to pay this money back, it would pretty much wipe out all the savings I have."
Many other Gulf Coast hurricane victims are in the same position, angry and frustrated at the prospect of repaying money they spent years ago as they tried to rebuild their lives.
FEMA is seeking to recover more than $385 million it says was improperly paid to victims of hurricanes Katrina, Rita and Wilma. The debts, which average about $4,622 per recipient, represent slightly less than 5 percent of the roughly $8 billion that FEMA distributed after the storms. At least some of the overpayments were due to FEMA employees' own mistakes, ranging from clerical errors to failing to interview applicants, according to congressional testimony.
But the agency says it is required by law to make an effort to recover improper payments, even if the recipient wasn't at fault. Last week, however, Congress approved legislation that would allow FEMA to waive many of the debts. President Barack Obama signed the measure — part of a $1 trillion spending package — into law last Friday.
FEMA spokeswoman Rachel Racusen said the agency is reviewing the law's provisions and developing a plan to implement them. It remains to be seen how many recipients of FEMA money could benefit from the change.
Sen. Mary Landrieu, a Louisiana Democrat who sponsored the provision, said disaster victims shouldn't be punished because FEMA was "dysfunctional."
"They have significantly improved the process," Landrieu said. "This is very unlikely to happen again."
Racusen said the agency has implemented "strong protections" to avoid making improper payments, reducing its error rate from about 14 percent after Katrina to less than 1 percent for more recent disasters.
"We have also worked to significantly improve the recoupment process so that it is more understandable and provides due process for both disaster survivors and taxpayers," she said in a statement.
FEMA's collection efforts aren't limited to the 2005 storms. The agency has mailed out more than 6,000 debt letters to survivors of other recent disasters, including floods.
Approximately 2,500 recipients, including 930 victims of the 2005 hurricanes, have appealed their debt notices. FEMA says about 30 percent of those appeals successfully erased at least some of the debt. Recipients also can ask for a waiver due to economic hardship or seek to set up a payment plan.
"It is important for any individual who has received a recoupment notice to know that these letters are the start of a conversation with FEMA, not the end," Racusen said.
This isn't the first time Bellinger has tangled with FEMA over funds he received to pay for renting an apartment in Atlanta. He was a plaintiff in a class-action lawsuit over the agency's decision to end housing subsidies for storm victims and its efforts to recover alleged overpayments. FEMA later paid more than $2.6 million to settle the claims.
That case had also delayed the debt collection process that Bellinger and other storm victims are now facing. Before the settlement, a federal judge in New Orleans ordered FEMA to suspend the effort in 2007 while it drew up new guidelines for the recoupment process. FEMA reinstituted the process earlier this year.
"What a way to celebrate Christmas, knowing I've got another FEMA battle on my hands," Bellinger said last week.
After Bellinger moved to Atlanta, the U.S. Department of Housing and Urban Delopment covered some but not all of his rent. He says he relied on FEMA's aid to make up the difference. FEMA claims he received a duplication of benefits, but Bellinger said the agency is mistaken.
"The fault is theirs, not mine, and they have to suffer the consequences," he said. "I submitted everything they required. As far as I know, I did nothing wrong."

Lubertha Haskin, a Gulfport, Miss., resident who turned 80 on Dec. 27, received about $8,000 from FEMA to repair some of Katrina's damage to her home and replace belongings. In October, FEMA sent her a debt letter that said her insurer had covered the same costs, a claim Haskin denies.

Haskin said she hadn't heard from the agency in five years and never suspected she could have to pay back the money.

"I was knocked for a loop," she said. "I don't have that kind of money. I have a lot of doctor's bills and other bills to pay."

Law firms and legal aid groups have volunteered to help Haskin, Bellinger and many others challenge FEMA's recoupment efforts.

"It's really unfair that the government waited this long to come after this lady," said Haskin's lawyer, Beau Cole. "They didn't deliberately do it, but the effect is the same."

The New Orleans office of Southeast Louisiana Legal Services, which offers free legal aid, has fielded more than 100 calls since September from people who want to challenge their FEMA recoupment letter. Rowena Jones, a lawyer for the group, said she hasn't seen the appeals process yield any "actual results."

"Our clients just don't seem to be getting a fair opportunity to contest the notices and get a hearing on it," she said.

The provision signed into law last week allows FEMA to completely waive the debt for somebody who earns less than $90,000 a year if the money was mistakenly awarded due to an error by FEMA. A debt involving fraud cannot be waived. Racusen said FEMA is "committed to applying the law to the fullest extent possible."

U.S. Rep. Bennie Thompson, D-Miss., said the recoupment process is flawed. Many debt letters have been returned as "undeliverable," meaning some people moved and don't even know they owe money, he said.

"Most of these individuals went through a lot of trauma," Thompson said. "For our government to all of a sudden say, `We made a mistake, you owe us money,' that's not how it should be done."

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Anyone with questions about the recoupment process, including appeals, can contact FEMA at 1-800-816-1122.

HOUSTON – Texans defensive coordinator Wade Phillips returned to the practice field Wednesday, two weeks after undergoing kidney and gall bladder surgery.
Phillips went on medical leave Dec. 14. Linebackers coach Reggie Herring ran the defense in his absence, and the Texans lost their next two games.
The 64-year-old Phillips surprised his players when he showed up at a meeting Monday. The Texans (10-5) were back at practice on Wednesday to prepare for the regular-season finale against Tennessee (8-7).
"It's good to be back," Phillips said. "It's not as funny now as it was before I was going in. I'm a little more sore than I thought I'd be. It's taken a lot out of me, but I'm working my way back, doing what the doctors say."
Phillips mingled with his players during the practice, but walked to the sideline late in the workout to sit on a golf cart with his father, Bum, the former coach of the Houston Oilers.
Coach Gary Kubiak is hoping Phillips will feel strong enough to work from the press box Sunday.
"It's good to have him back," Kubiak said. "I know it's good with the players. Got to be smart with him out here, make sure we don't get him banged around. But it's good to have him back out here and see that he's feeling much better."
Phillips was hospitalized for eight days, and says he's only now getting back to eating regular food.
"I'm starting to feel better and better," Phillips said. "I'll feel good, and then all of a sudden, my energy level does go down a little bit. But that'll get better as it goes."
Houston's defense has made a dramatic turnaround from 2010 in Phillips' first season, ranking second overall (281 yards per game). The Texans have already set a single-season record for sacks (41) and rank 10th in takeaways (26).
Phillips said the hardest part of his recovery is over, and returning to his regular schedule this week has lifted his spirits.
"Once you get into your routine, once you get to start eating and start being with the players and with the team, in the meetings and so forth, then everything gets easier," he said. "I'm just starting out, solid foods now. Once I get back to normal, which seems to be the case right now, that will get better and better."
Kubiak visited Phillips in the hospital and was relieved to see him back on the field again.
"Just for me, knowing what he went through, to see where he was then and where he's at right now, it's a great feeling," Kubiak said . "It's one thing you can't take for granted in life, your health. It's good to see him back out here, and I know we all appreciate it. The players are glad to see him back."