Italy's borrowing costs rose to a new record today as neither last week's European summit nor tough new austerity measures by the government of Mario Monti succeeded in restoring market confidence.
Domestic opposition to Mr Monti's austerity programme is increasing and markets are refusing to reduce the pressure on Italy, whose fate is at the core of the euro zone crisis.
Italy had to pay 6.47 per cent on five-year bonds in an auction today up from a previous euro era record high of 6.29 per cent in mid November.
Germany also sold debt, raising €4.2 billion in an auction of two-year bonds that sold at a euro-era record low yield of 0.29 per cent, compared with 0.39 per cent at the last such auction.
The German sale, which drew bids worth 1.4 times the amount on offer, illustrated how desperate investors are to find a safe haven for their money.
Adding to the pressure, Italy's top union leader told Reuters that Mr Monti's policies could cause a social explosion and it might be better for the country if he did not remain in power until the scheduled end of the legislature in 2013.
Yields on the secondary market on Italy's benchmark 10-year paper went above 7 per cent, the level at which Greece, Ireland and Portugal were forced to take bailouts.
Europe could not handle such a rescue for the much bigger Italian economy, whose debt amounts to 120 per cent of gross domestic product.
The euro zone's third-largest economy needs to raise €440 billion on the markets next year - with €160 billion of debt due by April - and interest at these levels is unsustainable.
Bank of Italy governor Ignazio Visco said last week that borrowing costs must fall to around 5 per cent to become manageable.
The European summit's decision last week to strengthen budget discipline dashed markets' expectations of urgent and decisive action and investors are now jittery over threatened downgrades from ratings agency Standard and Poor's on euro zone economies - a move that would deepen the crisis by making borrowing more difficult.
European Central Bank policymaker last night Jens Weidmann delivered a blow to hopes of more decisive ECB intervention to quell the euro zone crisis, saying his peers at the bank were growing sceptical of its bond-buy programme, which he openly opposes.
Mr Weidmann was witheringly critical of appeals for the ECB to do more to help debt-choked governments, comparing them to alcoholics pleading to be given a bottle, and said his Bundesbank would only provide fresh funds for the IMF to help fight the euro zone crisis if countries beyond Europe do so too.
The ECB's mandate prevents it from embarking on unlimited bond purchases and past experience showed this would inevitably lead to inflation, Weidmann said, resisting pressure for the bank to unleash unlimited intervention.
"I think the idea is astonishing that one can win confidence by breaking rules," he told journalists late yesterday at the Bundesbank's Frankfurt headquarters.
Mr Weidmann said he was "no fan" of the ECB's bond-buy plan - the so-called Securities Markets Programme (SMP) - that it introduced last year to help tackle the crisis, adding: "And the SMP's fans are becoming increasingly sceptical."
Mr Weidmann's predecessor, Axel Weber, resigned this year in protest at the programme, which he felt took the ECB beyond its core inflation-fighting role and too close to fiscal policy.
The ECB has nonetheless come under pressure from the United States and Britain in recent weeks to do more to fight the euro zone crisis, and some politicians in the 17-country region want it to act as a lender of last resort to governments.
Commenting on pressure for the ECB to fly to the rescue of debt-laden governments, Mr Weidmann said: "It is like an alcoholic saying that I need to get a bottle tonight.
"Starting tomorrow I will be clean and abide by the rules, but I need the bottle tonight. I don't think it is sensible to give the alcoholic the bottle. He won't have an incentive to solve the problem."
The Bundesbank chief said EU leaders reached "agreements that go in the right direction" at their summit last week but the ECB could not as a result be expected to go beyond the limits of its mandate by ramping up its bond purchases.
"I do not share this logic," said Mr Weidmann, who was Chancellor Angela Merkel's economics adviser until he took the Bundesbank helm in May. "It is not our job to punish or reward governments."
Italy could live with bond yields of 7 per cent for a while without serious problems and investors knew Mr Monti's Italian government was serious about making savings, he said, adding: "Italy must deliver."
The ECB slashed its purchases of government bonds to little more than half a billion euro in the run-up to last week's EU crisis summit, as it raised pressure on the region's leaders to tighten debt controls and cut spending further.
Reuters
