SPAIN AND Italy paid a high price to sell short-term debt yesterday, compounding investors’ concern that last week’s bailout package for Greece left the euro zone’s debt crisis unresolved.

Spain’s short-term cost of borrowing hit three-year highs and demand fell at its treasury bills auction, while yields at a sale of six-month Italian paper hit their highest since November 2008.

“The most important point again is the fact that relative to the last auction, yields are much, much higher,” said Marc Ostwald, a strategist at Monument Securities in London. “It shows we may have had some relief last week, but that relief has proven to be rather short-lived.”

Spanish and Italian benchmark bond yields rose after the auctions and the premium demanded to hold Spanish debt rather than lower-risk German bonds widened, reflecting investors’ doubts that European policymakers have resolved the crisis.

In another worrying sign, Deutsche Bank’s second-quarter results show that the German flagship lender has been slashing its exposure to peripheral euro zone countries, including Spain and Italy.

Five days after a euro zone summit agreed a second Greek rescue, Spanish and Italian bond yields are back to the levels seen in the days before the deal was struck. German Bund futures prices, the benchmark of the euro zone debt market, are also back up at pre-summit levels.

Top of analysts’ concerns is that the euro zone’s rescue fund, the European Financial Stability Facility, has not been given extra funds to draw upon despite being handed a much wider remit.

“People are concerned that the overall size of the EFSF still hasn’t been increased,” said Eric Wand, interest rate strategist at Lloyds.

There are also question marks about how many banks will sign up to the bond exchanges or buybacks agreed to ease Greece’s debt burden. Investment bank JPMorgan said some investors were unlikely to take up the offer to voluntarily swap Greek bonds that were maturing for longer-term paper and would instead sell whatever they had left on their books each time prices rebounded.

“We believe that it will be difficult to achieve the required 90 per cent participation rate since financial institutions will be tempted to sell Greek bond holdings into recent strength,” JPMorgan said.

Procedures for a voluntary swap of privately held Greek government bonds for longer maturity paper will start next month, Greece’s deputy finance minister said. – (Reuters)