Italy came under fire on financial markets today amid signs of government infighting and fears the euro zone's third biggest economy could join Greece, Ireland and Portugal into a debt spiral.
The Treasury had to pay sharply higher rates to sell off €8 billion in bonds including 4.8% on bonds due in 2014 that had last sold for 3.68%, and 5.77% on bonds due in 2021 compared with 4.94% before.
The difference between the rate of return on Italian and German 10-year sovereign bonds - a key measure of the financial risks as perceived by investors - rose to near-record highs of around 3.3 percentage points. This evening, Italian 10-year bonds were trading at 5.85%, while Spain's bonds were just above 6%.
Ireland's 10-year bonds were falling, however, down more than half a percentage point on the day to 10.73%. Irish yields have now come down from highs of around 14.5% in mid-July.
Investors are concerned that the Italian economy, suffering from high public debt, low growth and growing infighting in the government could follow Greece, Ireland and Portugal into a debt spiral that has thrown the euro zone into crisis.
Tensions on the Italian bond market went down after a second bail-out for Greece was agreed at a summit in Brussels last week but have been up again this week due to concern over the details of the Greek rescue plan and US debt fears.
Economy Minister Giulio Tremonti has come under pressure over a sleaze inquiry involving a key aide. There have also been rows between Silvio Berlusconi's main People of Freedom party and its coalition partner, the Northern League.
