Belfast Telegraph

Big blow for Italy as borrowing shoots above crucial 7% mark

By Ben Chu

Hopes that Italy is emerging from the economic danger zone have been dashed as Rome's long-term borrowing costs shot above 7%, an interest rate that is widely regarded as unsustainable.

The Italian government successfully managed to sell €2.5bn (£2.1bn) of 10-year debt at an interest rate of 6.98%, down from 7.56% at a similar auction last month.

But Italian 10-year debt in the secondary bond markets was soon trading above the critical 7% level, thwarting hopes of policymakers that this week's auctions of Italian government paper, the first since the administration of Mario Monti pushed through a major austerity package earlier this month, would mark a revival of investor confidence in the solvency of the Italian government.

Demand for the bond issue was also disappointing, with the total €7bn (£5.86bn) placement of notes falling short of the Italian government's upper target of €8.5bn (£7.12bn).

Italy's short-term debt costs halved earlier this week when Rome managed to sell €9bn-worth of six-month bills on Wednesday at an average yield of 3.25% (down from a euro-era high of 6.5% last month), giving some investors hope that the debt market's faith in Italy was picking up.

But 10-year bond yields are the more critical measure of investor confidence and the fact that Italy's long-term borrowing costs are still hovering around the 7% mark shows that Italy remains in the grip of a financial crisis.

The yield also stayed high despite reports of agents of the European Central Bank buying up Italian debt in the secondary markets.

The Italian Prime Minister, Mario Monti, has welcomed the fact that Italy managed to off load its latest tranches of debt, but admitted that his government had still not yet won the confidence of investors.

"Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn't over," he said.

Italy needs to roll over a total of €340bn (£284bn) in the bonds markets in 2012 in order to avoid a default on its €1.9trillion (£1.59trn) sovereign debt pile.