Italy forced to pay record interest rates at auction

Italy has been forced to pay record interest rates in a 10bn euro ($13bn; £9bn) auction of treasury bills.

The rate of interest for the new debts due to be repaid in six months was 6.504%, compared with 3.535% in the last comparable sale on 26 October.

The rate for two-year borrowing was 7.814%, up from 4.628% last time.

The Bank of Italy stressed that demand for the bonds had been high, with demand for the debts outstripping supply by 50%.

"The pricing is awful," said Padhraic Garvey, rate strategist at ING.

"The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."

The FTSE MIB in Milan dropped 1% following the auction, to take it down 1.9% on the day, underperforming the rest of Europe, where the London, Paris and Frankfurt's benchmark indexes were all down by about 0.5% on the day.

The Italian government's implied cost of borrowing, based on the price at which its debts are traded on financial markets, has risen steadily over the last few weeks to levels seen as unsustainable in the long-term.

However, it is only when the government raises new money at debt auctions, such as those held on Friday, that it is forced to actually pay the higher rates on its debts.

Italy plans to sell another 8bn euros at an auction on Tuesday.'Slow disintegration'

A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.

BBC