Italy hit by market fears of contagion
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Italian Prime Minister Mario Monti saw nearly seven months of confidence-building by his government wiped out by Wednesday, when the country's borrowing rates in a bond auction skyrocketed back near levels last seen in December.
A sale of 12-month bonds, a warm-up for Thursday's weightier longer-term debt auction, demonstrated the speed with which market jitters spread from Spain following Madrid's weekend concession that its banks need a bailout.
Italy paid an interest rate of 3.972 per cent - up from 2.34 per cent in a similar auction last month - to borrow 6.5 billion euros ($A8.2 billion) in 12-month money from bond markets.
Though demand was strong, the high rate suggests investors worry Italy may eventually need a rescue of its own.
"Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain's request for external assistance," sovereign debt expert Nicholas Spiro said.
Markets, he noted, are no longer differentiating fiscally stronger Italy from Spain, "which is a sign that panic has set in".
Just before the debt sale, Monti urged MPs to speed the pace of reforms in a bid to persuade sceptical investors - whom he referred to as "observers that don't nurture an innate sympathy for our country" - that Italy is able to make the necessary economic sacrifices to escape the debt crisis.
Although Italy's deficit is relatively low, at 3.6 per cent of GDP compared with Spain's 8.9 per cent, the economy is not growing and overall debt is huge, at 1.9 trillion euros. To lower that debt, the economy needs to become more competitive.
To achieve that, Monti's technocratic government passed a package of tax hikes and spending cuts in December, and has been moving ahead with structural reforms. However, lobbies and politicians have been resisting the reforms, raising concern that political infighting might - as so often in the past - hinder the country's ability to fix its economy.
Monti admitted the country must complement its painful budget cuts with measures to stimulate economic growth.
"We need to have fiscal discipline and growth policies for fiscal policies to be sustainable in the long term," he said in Berlin, where he was to receive a leadership award.