Italy sees higher borrowing costs at bond auction after indecisive election

FRANKFURT – Italy saw its borrowing costs jump in a pair of bond auctions Wednesday after an inconclusive election that has raised fears Europe’s government debt crisis will flare up again.

The country sold €4 billion ($5.2 billion) in 10-year bonds at a yield of 4.83 per cent, way up from 4.17 per cent last month. The yield on five-year bonds rose to 3.59 per cent from 2.94 per cent, as €2.5 billion was auctioned.

Bond interest costs are a key measure of Europe’s effort to keep its debt problems in check. Higher rates mean more skepticism about an indebted country’s ability to pay.

Election results earlier this week fueled concerns in the markets about the course a future government might follow. The centre-left alliance led by Pier Luigi Bersani narrowly won the lower house, but failed to gain control of the upper house. It’s not clear what kind of coalition can be formed to give the country a government that can pass legislation.

Just over half of Italians that voted cast their ballots in favour of either the centre right alliance of former Prime Minister Silvio Berlusconi or the Five Star Movement of former comedian Beppe Grillo. Both have voiced opposition to the spending cuts and tax increases that have marked 15 months Mario Monti has been the country’s premier.

A new government that turns away from austerity could make it harder for Italy to take advantage of a European Central Bank offer to buy bonds of indebted countries. The announcement of this new policy last September helped calm concerns over Europe’s debt crisis and the future of the euro.

The bond purchases could potentially lower borrowing rates of those countries that ask for assistance. Yet the ECB will only make them if the country agrees to take specific steps to lower its deficit and debt.

The mere existence of the bond purchase offer has lowered the borrowing costs for Italy and Spain even though no bonds have been bought. The fear is that markets will no longer think Italy is protected by the program if a new government rejects deficit-reduction ahead of time.