Confidence shaky, Italy sees borrowing cost rise

ROME – A week into his new job, Premier Mario Monti is running out of time to reassure nervous investors that his government has a strategy to deal with Italy’s crippling debts.

The nation’s borrowing rates skyrocketed Friday after a grim set of bond auctions, with a new auction looming Tuesday.

Another borrowing debacle could ratchet up fears that Italy has entered a debt spiral driving it toward bankruptcy and the 17-nation eurozone into its most acute crisis yet.

Monti’s government of so-called “technocrats” is battling to convince investors that it has a successful strategy to reduce the country’s $2.6 trillion debt. But Friday’s dismal bond auction results for the eurozone’s third-largest economy temporarily battered Europe’s stock markets.

The auction outcome also is likely to fuel calls for European Union officials to do more to jump-start economic growth and the European Central Bank to use more firepower to cool down a rapidly escalating debt crisis.

“We still haven’t found a response that reassures investors,” said Jose Manuel Barroso, head of the European Commission. “As long as we’re unable to do that, we’ll have very serious problems and discussions in Europe.” He spoke during a visit to Portugal, which, like eurozone members Greece and Ireland, has taken an EU bailout to avoid bankruptcy.

Driving market fears is the knowledge that Italy is too big for Europe to bail out. The auctions showed that investors see Italy’s debt as increasingly risky.

The country had to pay an average yield of 7.814 percent to raise $2.7 billion in two-year bills – sharply higher than the 4.628 percent it paid in the previous auction in October. And even raising $10.7 billion for six months proved exorbitantly expensive, as the yield for that spiked to 6.504 percent, nearly double the 3.535 percent rate last month.

Following the grim auction news, Italy’s borrowing rates in the markets shot higher, with the 10-year yield spiking 0.34 percentage point to 7.30 percent – above the 7 percent threshold that forced other euro nations into bailouts.