Cost of Italy's short-term debt surges by 40pc in month

September 13 2011 04:48 AM

ITALY'S short-term borrowing costs have surged 40pc in just one month, a bond auction yesterday showed, despite massive interventions from the European Central Bank (ECB).

The Italian government sold €7.5bn of one-year government debt at an average yield of 4.153pc yesterday, up from 2.959pc when similar debt was sold on August 10.

The Italian Treasury also sold €4bn of three-month debt, paying interest of 1.907pc, up from 1.034pc. The huge increase in short-term borrowing costs demonstrates the rapid erosion of confidence in Italy's financial stability, even though the country's long-term borrowing costs fell sharply recently.

A month ago, Italy's long-term borrowing costs hit a record 6.4pc, on fears the country could face an Irish-style EU/IMF bailout. The rising cost of borrowing threatened to become self-fulfilling by making its €1.8trillion of debt impossible to service.

In response, the ECB began buying Italy's long-term debt, driving borrowing costs down more than 1pc. However, the ECB does not intervene in the short-term debt market.

Yesterday, the ECB confirmed it spent €14bn buying such bonds last week, up from €13.3bn the previous week. The controversial purchases last week led to the shock resignation of ECB chief economist Jurgen Stark.

Yesterday's auction shows bond purchases have failed to convince lenders that bond prices reflect market realities.