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Eurozone deal fails to quell market worries over Italy

AFTER the initial euphoria of this week's European rescue package, the markets showed yesterday that they remain worried about certain indebted countries, notably Italy.

A German court also intervened to slow down decision-making over the eurozone debt crisis.

Italy's borrowing costs rose to their highest level since the euro was established as the country issued €7.93bn of debt. Yields on large portions of the debt hit almost 6pc.

As Europe's third-largest economy, Italy remains in focus and its yields refuse to drop -- even after there were borrowing gains for Greece and Ireland this week.

Italy sold €3.08bn of 2014 bonds to yield 4.93pc, the highest since November 2000, up from 4.68pc on September 29.

"They've sold the bulk of what they wanted to sell, but these are very high levels of interest that they are having to pay," said Marc Ostwald, a fixed-income strategist at Monument Securities in London.

The auction was the first test of investor enthusiasm for Europe's conventional bonds since the all-night summit reached a deal to boost the euro-area rescue fund, recapitalise banks and apply a 50pc reduction in how much Greece will repay bondholders.

Italy sold a total of €7.93bn of bonds, less than the maximum €8.5bn target. Also auctioned were €2.98bn of 2022 bonds to yield 6.06pc, €871m of 2019 bonds to yield 5.81pc and €1bn of floating-rate bonds, due in 2017, to yield 5.59pc.


"Today's auction was not very satisfying," said Annalisa Piazza, a fixed-income strategist at Newedge Group in London.

The premium investors' demand to hold Italy's 10-year bond, instead of German bonds, rose to 376 basis points.

German 10-year bonds, the region's benchmark, erased their drop, paring a weekly loss. The 10-year yield was little changed at 2.21pc in London, after rising earlier to 2.28pc. The two-year yield was 0.65pc.

EU leaders agreed to boost the firepower of the region's rescue fund in an effort to stop contagion from engulfing Italy, which has a debt of €1.9 trillion -- more than Spain, Greece, Portugal and Ireland combined. Italy has almost €200bn of bonds maturing in 2012.

Meanwhile, a German court has suspended a parliamentary committee's right to approve urgent actions by the eurozone's bailout fund, potentially delaying decision-making in Europe's top economy on key moves to tackle the bloc's crisis.

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A spokeswoman for the Constitutional Court said it would investigate whether the planned use of a small closed-door committee of nine German lawmakers to consider urgent matters relating to the European Financial Stability Facility (EFSF) infringed on lawmakers' rights.

The parliamentary leader of Chancellor Angela Merkel's conservative bloc, Peter Altmaier, said the suspension meant that parliament's entire lower house would need to decide on urgent matters relating to the EFSF.

But he said the court's action -- pending a final ruling on a complaint from two opposition lawmakers who allege that the committee's powers breach Germany's basic law -- would not tie the hands of either the Bundestag or the EFSF.

"The German parliament will ensure that, until the main ruling, Germany's ability and the EFSF's ability to act are secured," he added.

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