New Fears Over Europe, Italy’s Borrowing Costs Rising Again

Italy had to pay nearly double the interest rates to borrow money in a six-month bond auction Friday, reflecting new fears about economic problems in the countries that use the common European currency.

The euro currency and world stock markets also fell in value Friday.

The office of Italy’s new Prime Minister Mario Monti issued a statement Friday saying that Germany and France had agreed with him at Thursday’s mini-summit of the eurozones three largest economies that a debt collapse in Italy would be “the end of the euro.”

Both French President Nicolas Sarkozy and German Chancellor Angela Merkel said at Thursday’s meeting they would support Italy and the euro, and called for changes to European treaties to force better fiscal policies. However, there was no agreement about increasing the role of the European Central Bank in supporting troubled eurozone economies, or selling unified eurobonds.

The lack of concrete action at the meeting in Strasbourg, France, fueled investor fears of possible debt defaults by southern European countries. Italy’s sovereign debt currently is estimated at $2.6 trillion – far more than Greece or other European countries that have been given EU and IMF bailouts.

In Friday’s auction of six-month Italian bonds, the government had to agree to pay 6.5 percent interest, nearly double the rate in a similar auction last month.

Longer-term interest rates for Italian bonds are once again above 7 percent – rates similar to those faced by Greece, Ireland and Portugal when they were forced to seek international bailouts.