Italian short-term borrowing costs surge

By Neil Dennis in London and Guy Dinmore

November 25, 2011 -- Updated 1550 GMT (2350 HKT)

Rome (Financial Times) -- Italy's borrowing costs shot higher on Friday as Rome was forced to pay euro-era high interest rates to investors in what analysts called an "awful" auction of short-term debt.

Yields on two-year bonds jumped above 8 per cent after an auction of this debt and six-month bills raised the full targeted €10bn but at the cost of sharply higher yields.

The European Central Bank on Friday was reportedly intervening in the sovereign bond market again, buying Italian and Spanish debt in an effort to limit the unsustainable rise of interest rates.

"We're witnessing a slow-motion collapse of the world's third-largest bond market. It is agonising to watch," Nicholas Spiro, a London-based sovereign risk analyst, said.

The auction will add to pressure on Mario Monti, Italy's new prime minister leading a government of technocrats, to announce details of his plans to reduce Italy's budget deficit and promote economic growth as Italy hovers on the edge of renewed recession. After just a week in office, Mr Monti, former European commissioner, has only spoken in general terms of what he intends to do and has still not appointed his full team.

A cabinet meeting on Friday had been expected to announce names of deputy ministers and under-secretaries, but ministers emerging from the meeting said the issue was not discussed. Reports and comments from politicians suggest that Mr Monti has been blocked in his efforts to get the main political parties inside his government with senior posts.

Pierferdinando Casini, leader of the centrist UDC party, told reporters that the officials to be appointed by Mr Monti over the next days would not be politicians as this "would be in contradiction with the form [of the government]".

Friday's sale came at a much higher cost to Italy's treasury than previous sales, as investors demanded a yield of 7.814 per cent on the two-year bond, up from 4.628 per cent at the previous sale of this maturity in October.

The six-month bill demanded a yield of 6.504 per cent -- a euro-era high -- up from 3.535 per cent in the October sale.

Demand was modest, with the shorter-term debt sale covered 1.47 times and the two-year auction covered just 1.59 times.