Italy was obliged to pay the highest rate in more than a decade to sell a new bond issue, a sign that investors remained wary of the country’s political paralysis and a debt load equal to 120 percent of yearly economic output. If Italy’s borrowing costs become unsustainable, the country is potentially a much greater threat to Europe and the world economy than Greece.

“The current Italian government has lost the confidence of investors,” said Alessandro Giansanti, a rates strategist at ING in Amsterdam.

Elsewhere in the troubled euro zone, a big loss by an Austrian bank served as a reminder of the fragility of financial institutions, while a German supreme court decision scrambled efforts to speed up political decision-making.

The shift in mood was sudden and stopped a rally only a day after it began. On Thursday, major European indexes soared and bank shares rebounded following an all-nighter by European leaders that produced the boldest response yet to the debt crisis.

While major European stock indexes on Friday largely held on to their gains from the day before, investors seemed to be reflecting on the unanswered questions in the latest rescue package, which includes measures to bolster the resiliency of banks, to ease Greece’s crushing debt load and to turbocharge the euro area’s €440 billion, or $623 billion, rescue fund.

The benchmark indexes in Frankfurt, Paris and London were little changed at the end of trading Friday, while Italian shares fell 1.6 percent. The euro barely budged, trading at about $1.42.

The plan agreed to in Brussels early Thursday was short on details, which must be worked out by government technocrats in the weeks ahead. The pace is unsettling for markets, but that is the methodical way that European leaders are determined to operate. Elected officials are focused on their reluctant voters, not on investors impatient for bold initiatives.

“If you ask someone on the street, they’ll say they want the Deutsche mark back,” said Martin Lück, an economist at UBS in Frankfurt. “This is why the politicians need to move in a piecemeal fashion. They need to keep people on board.”

Germany’s Constitutional Court highlighted the complexity of European politics on Friday by issuing an injunction against a new panel in the German Parliament that is supposed to oversee the euro area rescue fund and accelerate decision making. Germany is the largest contributor to the fund.

Several dissident lawmakers complained to the court that Parliament did not have the right to delegate decision making to the panel, whose nine members were approved by a large majority on Wednesday. The court said Friday that the panel could not make decisions until judges had ruled on the merits of the complaint.

The parliamentary leader of Chancellor Angela Merkel’s conservative bloc, Peter Altmaier, said the decision meant that the entire Bundestag must decide on matters relating to the rescue fund, Reuters reported. But Mr. Altmaier insisted that the court decision would not interfere with operations of the fund, the European Financial Stability Facility.

“The German Parliament will ensure that, until the main ruling, Germany’s ability and the E.F.S.F.’s ability to act are secured,” Mr. Altmaier said, according to Reuters.

In Vienna, the Erste Group, an Austrian bank that is one of the most active institutions in Eastern Europe, reported a loss of €1.5 billion for the third quarter, caused by problems at its Hungarian and Romanian subsidiaries and a revaluation of its derivatives portfolio.

The bank, which also restated its 2010 earnings, had warned of the loss and the problems earlier in the month. Erste Group said Friday that it had sold almost all of a €5.2 billion portfolio of credit default swaps, a derivative the bank sold to customers as a form of insurance on government and corporate debt.

The disclosure about the swaps portfolio earlier this month raised questions about what other nasty surprises might be lurking in the balance sheets of European banks. Andreas Treichl, the chief executive of Erste Group, acknowledged that the bank had made mistakes. “We do have to accept the fact we caused a lot of concern,” he said during a conference call with analysts Friday.

Officials of the European Union and the International Monetary Fund 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.

Article source: http://www.nytimes.com/2011/10/29/business/global/italys-borrowing-costs-rise-amid-uncertainty-about-rescue.html?partner=rss&emc=rss