Italy sells bonds, but investors remain wary

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Italy sells bonds, but investors remain wary

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The cost of borrowing for Italy fell in the latest auction of government bonds but not by much.

Prime Minister Silvio Berlusconi — who is locked in a feud with his finance minister Giulio Tremonti and fighting for his political survival — is considered by economists to be costing his country with the so-called ‘Berlusconi premium’. That is as long as he is in office Rome they will have to pay higher interest rates to get investors to buy its bonds.

The rates would be higher still without the European Central Bank buying Italian government bonds, though not directly at the auctions.

A 60 billion euro austerity package intended to balance the budget by 2013 continues to bring out protesters but also is not inspiring confidence in the markets.

Investors are still wary of Italian bonds after two ratings downgrades in less than a week and as the timetable for a decree to pass economic reforms and approve the sale of state assets has slipped to next week.

The country’s towering debt pile and feeble growth rates have made it a focus of the crisis and Moody’s and Fitch cut Italy’s credit-ratings last week following a similar move by Standard & Poor’s in September.

Domestic politics has created further uncertainty with Prime Minister Silvio Berlusconi facing a confidence vote in his government on Friday.

Italy sold 6.19 billion euros of debt at the auction, close to the top of its target range.

Market pressures have pushed Italian bond yields over the summer towards levels that could in the long-term threaten the sustainability of the country’s 1.9 trillion euro debt.