Italian and Spanish bond yields rise to records on debt worries

The long-term cost of borrowing for Italy and Spain reached record high levels yesterday on concern that the eurozone debt crisis could spread to these two countries, traders said.

The price of debt bonds issued by Italy and Spain fell further, automatically pushing up the indicated yield, or rate, of the fixed interest attached to the instruments.

The rate on 10 year bonds issued by Italy rose to 5.451 per cent and on Spanish 10 year debt to 5.797 per cent.

These rates were at the highest levels since the creation of the eurozone.

Traders said that several factors were behind the rise in the yields, and particularly a meeting of leading figures in the European Union yesterday to coordinate their positions on a second debt rescue for Greece.

Traders were concerned about signs that the debt pressures which have hit Greece, Ireland and Portugal, could begin to affect Italy and Spain. Analysts at BNP Paribas bank commented that “investors are giving priority to safe investments and are switching to high quality assets, leaving aside those considered risky”.

This trend had been accelerated by the latest weak data on employment in the United States which had raised prospects that economic activity around the world might slow down.

Tension over the US sovereign debt market was also hanging heavily over the bond market.

Yesterday’s EU talks were called by EU president Herman Van Rompuy and included Eurogroup chairman Jean-Claude Juncker and European Central Bank president Jean-Claude Trichet, ahead of a same day gathering of finance ministers from the 17-nation eurozone.

“This is not a crisis meeting, but to coordinate positions”, said Mr Van Rompuy’s spokesman, Dirk De Backer.

“The agenda is Greece, not Italy”, he added.

Meanwhile in Milan, Italy’s financial regulator imposed temporary curbs on short selling after shares plunged on fears of contagion from Europe’s sovereign debt crisis, and in Asia the euro fell further on the same concerns. Held on the back of a roller-coaster week for the single currency, yesterday’s talks – to be expanded to the full EU 27 the following day – will focus on the prickly issue of private-sector involvement in a second bailout of Greece, a deal not expected before September.

But eurozone discord over how to bring banks and other private creditors to bear a share in a new rescue, without triggering a default which would ripple across the single currency area, is fuelling tension on nervous markets.

“Certainly we need to move as fast as possible to make sure that that programme is created as soon as possible”, said Polish Finance Minister Jan Rostowski, whose country holds the rotating EU Presidency.

“It’s not good to have it not finalised”, he said of the Greek rescue plan, while saying he was “not at all concerned” about contagion to Italy “which has a fiscal position which is under very good control”.

Initial French proposals for a voluntary rollover of Greek debt – buying new Greek bonds when current bonds come due – appear to have lost favour since a shock warning from Standard & Poor’s ratings agency that even this soft option would be viewed as a default of Greece.

Signs since point to a shift in sentiment, with Germany, the Netherlands and others now favouring a solution that will force the private sector into easing the taxpayer’s pain, whether or not this comes down to a default. The ECB meanwhile is opposing any Greek default, with Mr Trichet saying full or even partial and short-term default was totally unacceptable.