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Stocks slump as rising Italian yields cast doubt on Europe rescue

October 31, 2011 | 11:00 am

Another jump in yields on Italian government bonds is raising fresh doubts about Europe's latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down about 165 points, or 1.4%, to 12,064 at 11:40 a.m. PDT, after surging 3.6% last week.    

Most European stock markets fell 2% to 4% on Monday after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose to 6.09%, the highest level since early August, up from 6.02% on Friday. The yield on two-year Italian bonds surged to 4.99%, up from 4.75% on Friday and the highest rate since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, a major goal was to halt the "contagion" before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts, the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it.

The fund is expected to eventually guarantee bonds issued by deeply indebted countries, particularly Italy. The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work -- or they believe the Europeans will drag their feet implementing it. Although the broad framework of the rescue was announced Thursday, many of the details are still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of carmaker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership [in] the euro are all at risk," he said.


EU announces new plan to tackle debt crisis

Italy pledges reforms as part of debt-crisis plan

Will the rescue plan work? Watch European bond yields

— Tom Petruno

Photo: Italian Prime Minister Silvio Berlusconi. Credit: Remo Casilli / Reuters