Italy borrowing costs soar in volatile euro markets

Italy's borrowing costs soared at a closely watched bond auction on Thursday as investors worried by the euro zone debt crisis and an impasse over the U.S. debt ceiling exacted a high risk premium.
The 8 bln euro ($11.4 bln) auction was conducted in volatile markets made more feverish by rumours, denied by Italian politicians, that Economy Minister Giulio Tremonti was preparing to resign.
The pressure on Italian stocks and bonds reflected both concern about Rome's ability to cut its sovereign debt — second only to Greece's in Europe at 120% of annual output — and doubts over whether last week's summit of euro zone leaders found a durable solution to the Greek debt crisis.
Criticism of the latest euro zone bailout plan for Athens has surfaced at the IMF, as well as among European economists and market analysts, who say it does too little to reduce Greece's 340 bln euro debt.
A Reuters poll of 55 economists showed a majority felt that while the rescue package was a step in the right direction, it was not a turning point from which the crisis would be resolved.
Cyprus may be next in line for a bailout after its cabinet resigned on Thursday over a fatal munitions blast that destroyed the island's main power plant and compounded its economic problems, which include heavy exposure to Greek debt.
Italian yields at the bond auction jumped to 5.77% on 10-year paper, the highest since February 2000, and to 4.80% on three-year debt, the highest since July 2008. 

TREMONTI

Tremonti, long viewed as the guarantor of fiscal prudence in Prime Minister Silvio Berlusconi's fractious government, is under pressure over his use of a Rome apartment belonging to an aide under investigation for alleged corruption.
Umberto Bossi, head of the Northern League, part of Italy's governing coalition, dismissed rumours that Tremonti could lose his job, saying the affair was "nothing very serious". But the economy minister faces growing pressure from the opposition and media to explain himself, while his relations with Berlusconi have been strained for months.
At one stage on Thursday, the secondary market yield on 10-year Italian government bonds jumped to 5.99%, near peaks hit during the height of bond market panic shortly before the euro zone summit. It later fell back to 5.84%, up only 7 basis points on the day, as fears over Tremonti and the threat of a U.S. debt default partially eased.
The rise in Italy's borrowing costs may put in doubt its contribution to the next tranche of aid for Athens in the current Greek bailout plan, to which Rome signed up last year, euro zone officials told Reuters.
In a conference call of euro zone finance officials on Thursday, during which the next tranche of emergency loans for Greece was discussed, Italy said it might have to use a "step-out" option in September if its own financing costs rose higher than those on the Greek loans. 

IMF CONCERN