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Interest rates soar for tottering Italy

Interest rates rise to record 6.06 percent for 10-year Italian bonds. High interest rates signal market skepticism that Italy will cut spending and balance its budget by 2013.

By James Mackenzie and Valentina ZaReuters / October 30, 2011

Italy Prime Minister Silvio Berlusconi gestures as he attends a meeting in Rome Friday. Interest rates on Italy's 10-year bonds jumped to record levels, underlining its vulnerability at the heart of the eurozone debt crisis and skepticism about whether Mr. Berlusconi's struggling government can deliver vital reforms.

Remo Casilli/Reuters

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ROME

Italy's borrowing costs jumped to record levels on Friday, underlining its vulnerability at the heart of the euro zone debt crisis and scepticism about whether the struggling government of Prime Minister Silvio Berlusconi can deliver vital reforms.

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The 6.06 percent yield paid at an auction of 10-year bonds was the highest since the launch of the euro, and not far from the level reached before the European Central Bank intervened in August to cap Rome's borrowing costs by buying Italian debt.

Italy, the euro zone's third largest economy, is again at the centre of the debt crisis, as fears grow that its borrowing costs could hit levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome.

In a speech in Rome, Berlusconi insisted that Italy would meet its target of balancing the budget by 2013.

Tainted by scandal and repeatedly at odds with his coalition allies, Berlusconi has promised European partners a package of measures to spur Italy's stagnant economy and cut its towering public debt, but has failed to convince markets made sceptical by his repeated failure to deliver reforms.

European leaders welcomed a letter of intent on reforms that he delivered to their summit last Wednesday, but emphasised that the measures must now be implemented.

"The interest rates that they are paying are punitive," said Monument Securities strategist Marc Oswald. "Italy ... is still the 'bete noire' of the whole euro zone problem."

"They are still going to carry on having to pay higher yields unless they come up with reform plans and implement them. But anyone who expresses an optimistic opinion about that is probably looking through rose-tinted glasses," he added.

France and Germany have expressed open exasperation at a succession of unfulfilled reform promises by Berlusconi, and fear the crisis in Italy could spark a wider emergency that would threaten the very existence of the single currency.

Even if a weakened government manages to pass the promised reforms, most will not come into force until mid-2012. Markets are unlikely to remain patient for so long.

In his speech Berlusconi took aim at the euro, calling it a "strange" currency.

"There is an attack on the euro which as a currency has convinced no-one, because it belongs to more than one country but does not have a bank of reference and guarantee," he said, referring to reluctance by Germany and other countries to allow the European Central Bank to be used as a lender of last resort.

He later issued a statement saying his words had been interpreted in a "malicious and distorted" way.

"The euro is our currency, our flag. It is precisely to defend the euro from speculative attacks that Italy is making great sacrifices," the statement said.