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November 07, 2011

Euro zone trouble - Italy bond yields soar and EFSF bailout fund seeing higher interest rates

Italian government bond yields soared to near 15-year highs, putting the euro zone's third largest economy front and center of the region's debt crisis, despite scrambling efforts by policymakers to stem the growing contagion.

Italy, the world's eighth largest economy, overtook Greece as the prime threat to the stability of the 17-country single currency zone, as finance ministers met to try to find ways of building a firewall around the two-year-old crisis.

The EFSF bailout fund is having trouble borrowing at lower rates The euro zone's rescue fund, the European Financial Stability Facility, has raised €3 billion for Ireland in a bond auction, but it had to pay a higher interest rate than in previous auctions. The EFSF auction had to be postponed last week due to the turmoil on the financial markets. But today, demand was only slightly more than the €3 billion on offer and the effective rate or return paid to buyers of the bonds was 3.59%, higher than anticipated. At the last such sale in June, the bonds were sold at rates around 0.8 percentage points lower.

The EFSF fund is supposed to borrow cheap so it could lend to EU countries that cannot borrow.




Italian 10-year bond yields rose to their highest since 1997 -- approaching levels regarded as unsustainable -- with political turmoil in Rome threatening to drag a fourth European economy after Greece, Ireland and Portugal into the debt mire.

France announced new austerity measures designed to preserve its wobbly AAA credit rating, without which the euro zone might no longer be able to bail out its weakest members.

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