Italian rate plunge

Italy saw its borrowing costs fall dramatically at a pair of debt auctions on Wednesday, a possible sign of easing tensions on the financial market.

The Bank of Italy said the average yield on its nine-billion-euro ($11.8 billion) six-month bill offering was 3.251 percent. That is half the 6.504-percent rate it had to pay at the equivalent auction last month.

Another auction of two-year bonds also saw the yield fall to 4.853 percent from 7.814 percent last month.

Altogether Italy raised 10.7 billion euros ($14 billion) at the auctions. The falls in funding costs have helped the country's benchmark ten-year bond yield in the markets drop further below the 7-percent level.

Bond yields of 7 percent and over are widely considered to be unsustainable in the long run.

Stronger euro

The lower rates paid by Italy may be a sign that some of the money injected into the European banking system by the European Central Bank last week may be filtering through into government bonds.

European shares responded positively to the auctions in Wednesday trading and the euro also edged up.

A further test of investor confidence will come on Thursday, when the country holds a sale of three-year, seven-year and ten-year bonds.

More austerity

The auctions come as Italy introduces further austerity measures. Prime Minister Mario Monti, who is heading a technocrat government, received parliamentary approval last week for more tax increases and spending cuts, including the reform of the country's bloated pension system.

The government has also said it is planning a raft of measures to help stimulate the economy starting next year.

They include liberalizing professional associations, such as those of taxi drivers and pharmacists, which have been highly protectionist up to now.

Monti is also planning to change labor market legislation to make it easier to fire people. Supporters say the measure will help encourage employers to hire workers.

Italy is facing massive debts of around 1.9 trillion euros ($2.5 trillion). As the eurozone's third-largest economy, it is considered too big to save under the eurozone's current bailout funds.

Author: Timothy Jones (AFP, AP, Reuters)
Editor: Matt Zuvela