Italy’s Borrowing Costs Rise Amid Uncertainty About Rescue

European Union and International Monetary Fund officials hoped that the deal announced early Thursday would soothe market anxiety by easing the terms of Greece’s debt repayments enough to avoid default, as well as by building a war chest for safeguarding the larger Italian and Spanish economies against possible contagion.

Italy was supposed to help its own case this week by producing concrete evidence that it was streamlining its economy and cutting public debt. But Prime Minister Silvio Berlusconi’s government, weakened by internal strife, delivered only promises, handing officials in Brussels a “letter of intent” describing hoped-for measures.

While Italy has a relatively low fiscal deficit, its debt is equivalent to 120 percent of its gross domestic product, second-highest in the euro zone after that of Greece.

The market’s skepticism showed in the auction results Friday, when the Italian Treasury sold €7.9 billion, or $11.2 billion, of debt of varying maturities. It paid an average yield of 4.93 percent to sell bonds maturing in 2014, the highest since November 2000 and up from 4.68 percent on Sept. 29, according to Bloomberg News.

It had to pay 6.06 percent to sell 10-year bonds,  the highest yield it has paid at auction in the euro era.

Stocks on the Milan bourse fell 1.8 percent and the yield on the Italian 10-year bond rose 5 basis points to 5.91 percent, having reached as high as 5.97 percent, just under the 6 percent level that has signaled danger for other embattled euro-zone countries, including Ireland and Portugal.

Major european stock indexes were slightly lower at midday after rising in early trade.

Fears of contagion to Italy and Spain led the European Central Bank to begin buying the two countries debt on the secondary market in early August, after their 10-year bonds ticked over the 6 percent mark.

The spread, or gap, between the Italian security and the German 10-year bond, a gauge of market confidence, rose by 4 basis points to 3.7 percentage points, suggesting investors were more nervous about holding the Italian debt.

Article source: http://feeds.nytimes.com/click.phdo?i=41cccecd12375a00a5a87dd10a15f7d1