Belgium joins Italy in markets' line of fire


THE EURO fell to its lowest in more than seven weeks against the dollar yesterday and was poised to weaken further after a disappointing Italian bond auction stoked fears that the euro zone crisis was deepening.

Standard Poor’s added to those worries after the rating agency lowered Belgium’s rating by a notch to AA and placed its credit outlook on negative.

Italy paid a record 6.5 per cent to borrow money over six months yesterday and its longer-term funding costs soared far above levels that are seen as sustainable. The rise in borrowing costs came even as the European Central Bank bought bonds in the secondary market.

Signs the euro zone debt crisis was threatening the region’s biggest economies such as France and Germany have raised fears of a break-up of the 17-member currency bloc.

After the poor German bond auction on Thursday, bidding for Italian debt was also lacklustre yesterday. Italy’s two-year yield rose to a euro-era high above 8 per cent and 10-year yields traded above 7 per cent, a level that is seen as unsustainable.

“The Italian auction was a disgrace this morning. It was worse than what the market had expected,” said Thomas Molly, chief dealer at FX Solutions at Saddle River, New Jersey.

Belgian bonds also succumbed to pressure ahead of auctions next week. The 10-year Belgian government note yield edged up to 5.89 per cent, up 3 basis points on the day and up almost 100 basis points on the week.

Belgium’s sovereign rating was cut by Standard Poor’s before the US’s early close. SP cited “renewed funding and market risk” on Belgium’s financial sector, already strained by Dexia’s nationalisation earlier this year, and “increasing likelihood ... that economic growth will slow, given the deleveraging of the European financial sector”. – (Reuters; The Financial Times Limited 2011)