Italy had to pay much higher rates to raise fresh funds today as nervous investors kept a wary eye on the Greek debt crisis amid fears it could drag down other euro zone members.
The Italian treasury issued €8 billion in six-month bonds and €2.5 billion of bonds due in 2013, with investors submitting bids worth €18.3 billion.
But the Italian government had to pay a yield - or rate of return for investors - of 1.988% on the six-month bonds, up sharply from the 1.657% paid at the last previous sale. On the 2013 bonds, the yield jumped to 3.219% from 2.851%.
On Friday, Italian financial markets were hit by a bad dose of nerves following warnings of possible downgrades by ratings agencies and amid fears of contagion from Greece.
The spread between Italian and German 10-year bonds hit the highest level since the creation of the euro, while banking shares suffered a shock plunge following market rumours of an imminent downgrade of Italy's sovereign rating.
Italian officials had earlier warned of the possibility of speculative attacks in recent weeks and have said the actions of ratings agencies are unwarranted.
Standard & Poor's and Moody's have both warned they could downgrade Italy's sovereign credit rating and Moody's on Thursday said it had put the ratings of 16 leading Italian banks on review for a possible downgrade.
Italian Prime Minister Silvio Berlusconi last week warned that the 'locusts of speculation' were waiting to attack Italy on financial markets at the first sign of weakness and urged unity within his embattled government.
Italy's debt burden at some 120% of gross domestic product is twice the euro zone limit but still better than several other members. The government is due to present another round of austerity measures worth €40 billion later this week, aiming to balance the budget by 2014.
Spain & Italy suffer most from Greek debt crisis
Spain and Italy are taking the hardest hit from Greece's sovereign debt crisis but Madrid will not need a bail-out, Spanish Finance Minister Elena Salgado said today.
The risk premium charged on Spanish bonds compared with safer-bet German securities 'is rising, it is under enormous tension,' she told Spainish television.
'All euro zone nations are facing this tension but Italy and Spain are at the moment the two countries which are suffering most from this tension,' she added.
Salgado said the Spanish government has had no problems raising money on the debt markets.' 'Spain is financing itself very well,' Salgado said, adding that demand for government bonds always outstripped supply by about four times.
'Therefore we are not, nor will we be on the brink of any bail-out,' she stressed.
Spain's accumulated public debt amounted to €679.78 billion or 63.6% of GDP at the end of the first quarter, up from 55% a year earlier and its highest level since 1988.
But the country's debt level is still relatively low compared to its euro zone neighbours - the average debt-to-GDP ratio of the 17 euro zone countries stood at 85.1% at the end of 2010 - and it trails the levels reached in Greece, Ireland and Portugal, all three of which have required EU-IMF bail-outs.
Salgado rejected any comparison to the three euro zone nations which have had to ask for European Union-International Monetary Fund bail-outs.
'We don't have the problems of Ireland and its financial sector, or the problems of Greece with the deficit which they did not reveal, or the problems of Portugal with slow growth during many years and a weak export sector,' the Minister said.
