Investment sell-off sparks rise in Italy and Spain borrowing rates

Italy’s borrowing rates hit a new euro-era high today as a global market sell-off reignited fears that the debt crisis will engulf the eurozone’s third-largest economy.

Italy’s borrowing rates hit a new euro-era high today as a global market sell-off reignited fears that the debt crisis will engulf the eurozone’s third-largest economy.

Premier Silvio Berlusconi is to address parliament on the state of the economy, but opposition parties called for him to step down, saying his lack of economic credibility in the markets was part of the problem.

Spain was also under the market spotlight, forcing Prime Minister Jose Luis Rodriguez Zapatero to delay his holiday by a day to monitor the bleak scenario in the markets.

In morning trading, Italy’s 10-year borrowing rate spiked to 6.21% before easing somewhat, while Spain’s rose to 6.34%, a little shy of Tuesday’s euro-era high of 6.45%.

The revival of the debt crisis is largely related to a global sell-off by traders of any investments that appear risky – such as the bonds of Italy and Spain.

Whereas both countries could continue borrowing at their current rates, their financing costs would increase, adding to the debt pile that is the source of market worries.

The fear is that the global market turmoil will push the two countries closer toward needing a bailout.

“The upward march in Spanish and Italian bond yields is evidence of the relentlessness of the sovereign debt crisis,” said Jane Foley, an analyst at Rabobank International.

Italy’s austerity package passed last month aims at balancing the budget by 2014 but has done little to calm markets.

Opposition parties, commentators, economists and the non-partisan president all have called for deeper reforms to encourage investment and growth and regain market confidence.

“At this moment, it is up to the political forces, both in the government and opposition, to work with civil society to make choices to decisively stimulate the indispensable growth of the economy and employment,” President Giorgio Napolitano said in a statement.

Finance Minister Giulio Tremonti, meanwhile, travelled to Luxembourg to talk with Jean-Claude Juncker, the chairman of the Eurogroup meetings of eurozone nations.

In Rome, the turmoil added political pressure on Mr Berlusconi. The main opposition party leader Pier Luigi Bersani said there was “global scepticism of Mr Berlusconi, while his deputy, Enrico Letta, said it was time for the premier to step down.

“He cannot be the one to propose solutions, seeing that he is a big part of the problem,” Mr Letta said.

High yields show the additional interest investors demand to hold the country’s debt, and underline how a government’s financing costs could rise when they need to tap bond markets again. As fears of default increase, interest rates rise and make paying debt even harder in a vicious circle.

Italy has debt of 120% of economic output, but had been viewed for months with calm by bond markets. The country has low levels of private debt and has not had the property boom and bust that caused trouble for the United States, Spain, and Ireland.

But it suffers from chronically low growth and investors doubt the government’s willingness and ability to push through painful economic reforms.

Spain, meanwhile, is struggling to recover from nearly two years of recession triggered in large part by the collapse of an overheated property sector. Burdened by a swollen deficit, the country’s jobless rate stands at a eurozone high of nearly 21%.

Mr Zapatero has called early general elections, largely due to pressure from the financial crisis and because he wants a new government to manage the troubled economy from the start of the year.

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