Italy pays more for debt despite EU accord

Friday 28 October 2011 18.03
Italy raises €7.9 billion in latest bond auction
Italy raises €7.9 billion in latest bond auction

Despite a key European pact to tackle the euro zone debt crisis, the state of Italy's economy is still worrying the markets, forcing Rome to pay high interest rates to raise fresh funding.

At a bond auction, the yield - the rate of return earned by investors - on bonds due in 2022 topped the red-line 6%, a level many analysts believe is unsustainable in the longer run for the public finances.

The bonds were sold at 6.06%, up from 5.86% at the last similar operation on September 29.

Despite the euphoria seen after yesterday's EU plan, aimed at preventing the debt crisis from bringing down Italy and the wider euro zone, "Italian rates continue to flirt with the 6% mark," bond specialists said. They stressed how important it is that the rates come down again in light of Italy's poor growth rate and vast mountain of debt.

The country's colossal €1.9 trillion debt is equal to 120% of its gross domestic product, compared with the EU's limit of 60%.

Rates went up across the board in today's auction, showing the market judges Italy to still be at significant risk and wants more money to lend funds to Rome.

The yield on bonds due in 2017 shot up from 2.33% to 5.59%; 2014 bonds rose from 4.68% to 4.93% and 2019 bonds soared from 4.03% to 5.81%. In all, the Treasury raised €7.94 billion but failed to reach its target of €8.5 billion.

The impact on the stock market, which jumped more than 5% yesterday on news of the euro zone deal, was severe, with Milan shares closing 1.8% lower this evening, dampening the tone in other markets.

According to analysts, investors consider Italian debt to be high risk because they have little confidence in Prime Minister Silvio Berlusconi, despite the assurances he gave his European allies on economic reforms.

Analysts also said that markets were waiting to see the details of the new European plan, in order to judge whether the measures would be sufficient to avoid debt contagion to at-risk countries including Italy and Spain.

Berlusconi has promised Europe he will present the details of his own reforms - including selling off state assets and making it easier to sack people - by November 15, and implement them over the next eight months.

Italy also confirmed its aim to balance its budget in 2013 on the back of two draconian austerity packages adopted by parliament earlier this year. However, the coalition government is plagued by tensions which have sparked talk that the beleaguered premier - whose popularity is at an all time low - will be forced to call early elections instead of winding up his mandate as planned in 2013.

Italy's economic health does not rest in Berlusconi's hands alone - but also in the detail of the EU's plan to shore up the euro zone, including boosting the bloc's rescue fund, the European Financial Stability Facility (EFSF).