Italy pays record debt interest on new bonds

Euro notes, in triangles, holding each other up

Italy has to refinance its debt pile this year

Global Economy

Italy has had to pay more to borrow money, despite passing new austerity measures last week.

Italy sold 3bn euros ($4.2bn, £2.6bn) worth of 5-year bonds at a 6.29% yield on Monday, a new eurozone record.
The news came as figures from the Eurostat agency showed industrial production falling 2% during September in the 17 countries that use the euro.
European markets reacted with uncertainty to the news, with the FTSE falling by 0.5% at midday.
The yield on existing Italian debt, traded in the market, topped 7% last week before falling back after parliament passed new austerity measures and Prime Minister Berlusconi resigned.
However, the high rates only become a problem for the government if it is forced to pay them when it issues new debt.
Monday's 6.29% rate on new debt is the highest Italy has had to pay since 1997.
It compares with a rate of 5.32% at a similar auction in October.
Investors are looking to see if Italy can form a new government under the leadership of economist Mario Monti.
Around 200bn euros worth of Italian debt will need to be refinanced by April next year.

Crisis jargon buster

Use the dropdown for easy-to-understand explanations of key financial terms:

Yield

The return to an investor from buying a bond implied by the bond's current market price. It also indicates the current cost of borrowing in the market for the bond issuer. As a bond's market price falls, its yield goes up, and vice versa. Yields can increase for a number of reasons. Yields for all bonds in a particular currency will rise if markets think that the central bank in that currency will raise short-term interest rates due to stronger growth or higher inflation. Yields for a particular borrower's bonds will rise if markets think there is a greater risk that the borrower will default.

Glossary in full

Economic slowdown

The September fall in industrial production in the eurozone was not as bad as some investors had feared.

However, production in September increased by 2.2% year-on-year in the eurozone, which was below expectations of a 3.3% rise.
"Eurozone manufacturers are clearly now finding life extremely challenging as domestic demand is hit by tighter fiscal policy across the region," said Howard Archer from IHS Global Insight.
The eurozone is also being hit by a global downturn.
"Slower global growth has hit foreign demand for eurozone goods hard," Mr Archer added.
Estonia, Portugal, Italy, the Irish Republic and Germany all saw significant falls in output with German industrial production down 2.9%.
Also, official third-quarter figures for Portugal's GDP showed a decline of 0.4% for the debt-ridden economy.
Market jitters The negative economic news dampened the mood on the markets.
By the middle of the trading day on Monday, German, French, British and Italian benchmark indices were all down between 0.5 and 1%.
Share values had initially recovered on hopes that changes to the Greek and Italian governments would help resolve the eurozone debt crisis.
However, there are concerns that the eurozone economy could start contracting again by the end of the year.
"The weak end to the quarter suggests that industrial output may contract pretty sharply in Q4," said Ben May from Capital Economics.
"In all, then, these data appear to support our view that the eurozone will soon fall back into another fairly deep recession."

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Monday, 14 November 2011