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Italian bond yields hit 14-year high as debt fears worsen

November 7, 2011 | 11:59 am

Investors pushed yields on Italian government bonds to new euro-era highs on Monday, a further blow to European leaders' efforts to keep their 2-year-old debt crisis from spiraling out of control.

Italy, which has the world’s third-largest bond market after the U.S. and Japan, has been in traders’ cross hairs for the last two weeks as doubts have mounted about Europe’s latest plan to contain its debt debacle.

The market yield on 10-year Italian bonds surged to 6.57% on Monday, up from 6.37% on Friday and the highest since 1997.

The yield has rocketed from 5.50% just four weeks ago, and has continued to rise even though the European Central Bank is believed to have been buying Italian debt in the market, trying to keep a lid on rates.

To put Italy’s borrowing rates in perspective, German 10-year bonds pay just 1.78%. U.S. 10-year Treasury notes yield 1.99%.

Italian bond yields “are the litmus test now for the Eurozone debt crisis,” said David Rosenberg, market  strategist at Gluskin Sheff & Associates in Toronto.

Italian yields jumped at the outset of trading, then pulled back briefly as rumors swirled that embattled Italian Prime Minister Silvio Berlusconi would resign. But Berlusconi said he had no intention of leaving.

Eurozone leaders on Oct. 27 announced a plan to expand their $600-billion rescue fund for member states and banks, hoping to stop the continent’s debt nightmare from spreading.

The idea was to boost the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it. The fund could then 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 confidence in the fund as a solution has faded. Eurozone leaders have so far been unable to persuade major creditor nations, such as China, to contribute to the bailout fund as hoped.

Many analysts believe that an interest rate of 7% on long-term Italian debt would be so prohibitive for Italy that it would be forced to seek help from the rest of Europe to pay its bills.

Yet so far, “It is abundantly obvious . . . that there is no comprehensive plan to solve the crisis, at least not one that is yet viable and ready to be implemented and appropriately and adequately funded,” Rosenberg wrote in a note to clients.

Despite the worsening debt picture, most European stock markets were only modestly lower on Monday. And the Italian market, which dived 7.8% last week, managed to edge up 1.3% on Monday.

The euro currency weakened slightly, losing 0.3% to $1.376.


Greek parties agree to form unity government

Gyrations on policy leave Greeks dizzy

U.S. stays on sidelines in Eurozone debt crisis

-- Tom Petruno

Photo: Italian Prime Minister Silvio Berlusconi. Credit: Max Rossi /Reuters