Record interest rates put Italy back in line of fire

By Nikhil Kumar

Fear made a swift return to the eurozone yesterday as Italy faced record borrowing costs in its first attempt to tap the markets since European leaders came up with new plans to rein in the sovereign debt crisis.

The lack of confidence in their proposals was laid bare when Rome was forced to pay interest rates of more than 6 per cent to borrow money for 10 years by selling new bonds. The rate – the highest for new 10-year bonds since the country adopted the single currency – reignited concerns about Europe's ability to deal with the crisis as it threatened to spread to countries that are seen as too big to bail out.

Less than 36 hours before the Italian bond sale, leaders agreed proposals to reduce Greece's debt burden by asking private investors to take voluntary losses of around 50 per cent on their holdings of the country's debt. Plans for the so-called haircut on Greek bonds were accompanied by proposals to recapitalise banks and implement sweeping guarantees on bank funding as politicians attempted to restore confidence in the markets.

But the Italian auction, which also saw three-year yields rise to 4.93 per cent, the highest since November 2000, offset any lingering optimism about the package. The disappointing bond auction came shortly after Italy's Prime Minister, Silvio Berlusconi, who has been facing growing pressure from France and Germany to cut his country's debt burden, attempted to counter speculation that his government could collapse as it attempts to implement wide-ranging economic reforms.

"The important thing at the moment is to maintain a cohesive majority and [for] government to pass reforms," Mr Berlusconi said.

The high borrowing rates, however, suggested that the markets were far from convinced of his ability to enact the changes needed to put Italy on a more sustainable footing. "The interest rates that they are paying are punitive," said Marc Oswald, a strategist at the institutional and corporate broker Monument Securities in London. "As far as Italy goes, it is still the bête noire of the whole eurozone problem."