Italy borrowing costs hit record 7%

[mattbatchelor]

Italy's cost of borrowing has touched a new record, a day after Prime Minister Silvio Berlusconi said he would resign once budget reforms are passed.

The yield on Italian 10-year government bonds reached more than 7%, the highest since the euro was founded in 1999.

The debt was pushed up as a clearing house asked for a larger deposit to trade Italian bonds - to cover the increased risk of non-payment.

Investors fear that Italy could become the next victim of the debt crisis.

LCH Clearnet, a clearing house for buying and settling debt, has asked for a larger margin, or deposit, for trading debt of the eurozone's third-biggest economy.

Rates on the 10-year bonds are currently the highest since June 1997, when Italy still had the lira.

They are even higher on one- and two-year Italian debt, meaning that it is considered even less likely that Italy will pay back what it owes immediately than in a decade's time.

Italian stocks dropped 3%, while the benchmark German and French stock indexes fell more than 1%.

Separately, the make-up of Greece's new government is expected to be announced.

Stocks fall
 
The rate of 7% is considered by most investors as unsustainable. The higher the yield - the implied cost of borrowing - goes for Italy, the more likely it is that the country's huge economy will need to be bailed out - something that the eurozone has been desperately trying to avoid.

Italy has to roll over more than 360bn euros (?309bn) of debt in 2012.

The BBC's business editor Robert Peston said: "No one wants to lend to a country when that country would use the loan to pay the interest on previous loans - that's throwing good money after bad."

On Tuesday, Mr Berlusconi said that he planned to resign after won a budget vote, but did not succeed in getting an absolute majority in the lower house of parliament.

After rising in early trade, stock markets in Europe fell back. French banks, which are heavily exposed to Greek debt, continued to rally.

Shares in BNP Paribas rose 2.2%. Societe Generale gained 2.1% and Credit Agricole rose 1.8%.

On Tuesday, SocGen reported that quarterly profits had fallen by 31% because of a 60% write-off on its Greek loans.

Greece, which has been bailed out twice and is undergoing painful austerity cuts, also looks close to forming a new government.

In some good news, record exports pushed the trade surplus of Germany - Europe's largest economy - to a three-year high in September, data showed on Tuesday.


Source: BBC NEWS