Italy's borrowing costs hit record

Pressure mounted on debt-stricken Italy as its long-term borrowing costs and EU monetary affairs commissioner Olli Rehn met Italian prime minister Mario Monti.

Italy paid a record 6.5 per cent to borrow over six months today, almost double compared to a month earlier, showing the appointment of an emergency government to tackle the debt crisis had failed to put a brake on Rome's spiralling borrowing costs.

Though Italy managed to raise the full planned amount of €10 billion, weaker demand and the highest yields since the country joined the euro frightened investors, pushing Italian stocks lower and bond yields higher on the market.

Yields on two-year Italian BTP bonds soared to more than 8 per cent in response, also a euro lifetime high, despite reported purchases by the European Central Bank.

"The pricing is awful," said Padhraic Garvey, rate strategist with Dutch bank ING in Amsterdam. "The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."

Investors' attention will now turn to a bond sale of up to €8 billion that Italy is planning for next Tuesday.

"For the BTP auctions next week, we'll have more of the same they'll probably get it done at a concession," Mr Garvey said.

Italy's new technocrat government, which took power last week, is at work on structural reforms to revive the stagnant economy but markets are looking for quick and effective responses from European policymakers, such as a greater involvement of the European Central Bank.

Traders said the ECB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its reluctance to prop up high-debt euro zone governments, its bond-buying programme has been conducted intermittently, and never powerfully enough to provide more than short-term stability.

New Bank of Italy governor Ignazio Visco said short-term measures to tame Italy's budget deficit would not be enough to solve the country's economic problems and only structural reforms will generate growth.

At an annual average rate of just 0.3 percent over the past decade, the Italian economy has grown faster than only a handful of other countries across the world. Real purchasing power has fallen 4 percent in 10 years.

Since being thrust to the fore of the euro zone crisis in July, Italy has always managed to attract sufficient demand at its auctions.

But record high yields threaten Rome's planned gross issuance of €440 billion for 2012 as interest payments on the country's €1.9 trillion debt pile rise.

Analysts say that, at current yield levels, the euro zone third-largest economy risks losing market access as redemptions totalling a massive €150 billion for the February-April period approach.

By comparison, Spain paid 5.2 per cent to sell six-month paper at a much smaller short-term auction earlier this week, after elections handed power to an austerity-committed conservative government.

Reuters