Italy issued 10-year debt on Friday but paid the highest price since joining the euro as investors demonstrated scepticism over the centre-right government’s economic reform programme in the first bond auction in the region since new steps were agreed to tackle the eurozone debt crisis.

The yield on Italy’s March 2022 bond rose to 6.06 per cent from 5.86 per cent a month ago. The sale of the 10-year bonds was covered less than 1.3 times, but demand for the total sale of medium and long-term paper was sufficient for the Treasury to raise €7.94bn – at the top end of its target range.

The yield on a three-year debt maturing in July 2014 rose to 4.93 per cent, at its highest since November 2000, compared to 4.68 per cent at an end-September sale.

“All in all, today’s auction was not very satisfying,” said Annalisa Piazza at Newedge Strategy. “Although the EU summit welcomed the new measures the Italian government is planning to implement in the next eight months to ‘change’ the economy, markets remain sceptical about the outcome.”

Officials recognise that yields at this level are unsustainable in the long term with Italy needing to roll over more than €250bn next year to finance its €1,900bn debt burden, amounting to 120 per cent of gross domestic product.

Italian stocks widened losses after the sale with a trader citing the negative impact on investors’ confidence of the psychologically sensitive 6 per cent level for 10-year yields.

The 10-year yield gap between Italian and German bonds widened after the auction to 378 basis points, about 10 bps wider on the day.

Adding to jitters about Italy’s debt and equities market, Italy’s sixth largest bank by assets, Banca Popolare di Milano announced an €800m rights issue with an unprecedented 40 per cent discount to its theoretical ex-rights issue price.

The auction served to underline Italy’s current dependence on purchases of its bonds on the open market by the European Central Bank in a programme that began on August 8 as yields rose above 6 per cent. The ECB is exerting pressure on Silvio Berlusconi’s coalition government to implement measures to cut debt and promote growth as a condition for continuation of the bond purchase programme.

Investors are worried that Mr Berlusconi’s road-map is insufficient as Italy’s economy teeters on the edge of a double-dip recession, and are not convinced that the government, with its thin majority in parliament, has the capacity to push the measures through.

The Treasury on Friday also announced plans to sell sovereign debt to retail investors directly through an internet trading platform run by the Italian stock exchange to tap into the country’s private savings.

The move by the Italian Treasury comes as Italian banks, such as Milan’s Mediobanca, have been successful in boosting their capital by selling tranches of bank securities directly to Italy’s wealthy private investors through the internet following publicity campaigns.

After the US, Italy would be the only country to undertake such a project. Spain had tried in the past but pulled the idea due to cost and lack of interest.

The Treasury is expected to launch a campaign in the new year. Italian retail investors traditionally have been among the biggest consumers of state securities. Italy’s private wealth is one of the highest in Europe at nearly €9,000bn, according to Bank of Italy estimates.

But competition for that wealth pool has increased from Italian and foreign banks as they seek to boost their capital through the sale of structured products, giving the Treasury an incentive to secure a direct connection to Italian retail investors as amid already weak demand it cannot risk to lose that support.

Analysts noted that Friday’s auction was the first test of Italy’s credibility on debt markets since the eurozone summit in Brussels that ended early on Thursday.

Speaking after a cabinet meeting on Friday, Mr Berlusconi tried to dismiss growing speculation that Italy is heading for elections in early 2012, a year ahead of schedule.

“No credible political alternative exists,” he said.

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