Italy borrowing costs at record highs at debt sale

Italy's borrowing costs hit fresh euro-lifetime highs above 7 percent at debt auctions on Tuesday, levels which if sustained would make financing its huge public debt unaffordable, in a further sign that Europe's sovereign debt crisis is escalating.

The Treasury raised 7.5 billion euros by selling three- and 10-year bonds, at the top of its target range. The sale's completion spurred a relief rally in the euro and in European stocks, as investors had expected limited demand and yields to be sharply higher than in the secondary market.

"Great relief, it's all done," said Marc Ostwald, a strategist at Monument Securities. But he added: "We will never get away from the point that this is not sustainable in the long run."

The yield on the new three-year Italian government bond soared to almost 8 percent at the auction, in line with where it had traded in the grey market before the sale, and the highest Rome has paid since the euro's inception in 1999.

The 7.89 percent paid was almost three percentage points higher than at the last sale of three-year debt a month ago.

Italy's two-year yields had also spiralled above 8 percent after it paid a euro-era high yield of 6.5 percent to sell new six-month paper at a poorly received auction on Friday.

WAITING GAME

Italy, the world's third largest debtor with a 1.9 trillion euro debt pile — equivalent to 120 percent of economic output, and too big for the euro zone to bail out — needs to refinance some 340 billion euros of maturing debt next year.