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Italy's Prime Minister Mario Monti called for significantly more firepower for the euro zone's bailout fund after a bond auction did little to ease concerns over how the country would finance public spending in the next few months.
Italy's borrowing costs fell from record highs at a bond auction on Thursday but cautious investors still demanded a near 7-percent yield to buy 10-year debt.
Such high costs keep intense pressure on euro zone's third-largest economy as it heads towards a refinancing hump early next year, and traders said the European Central Bank stepped into the open market after the auction to buy Italy's bonds in a bid to hold down yields.
An unprecedented ECB injection of nearly half a trillion euros of cheap funding for banks and a new Italian budget package this month eased pressure at a short-term debt auction on Wednesday, but longer-dated bonds still pose a challenge.
"Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn't over," Monti said during a traditional end-year press conference. To calm markets further, "most of the work needs to be done in Europe," he said.
He said the European Financial Stability Facility needs "significantly greater" resources but refused to quantify how much more the fund needed.
Italy sold 7 billion euros of bonds on Thursday in thin holiday markets, just above the mid-point of its target range.
It managed to sell the top planned amount of its 10-year benchmark bond but the yield was 6.98 percent, not far from a euro lifetime record of 7.56 percent a month ago.
"Buying 10-year Italian bonds is a leap of faith which investors are prepared to take only at very high interest rates," said Nicholas Spiro of Spiro Sovereign Strategy. "There are simply too many risks and uncertainties surrounding Italy."
Italy's 10-year yields remained locked above 7 percent on the secondary market on Thursday, a closely watched threshold that has pushed other euro zone countries to seek bailouts.
Its 3-year bonds sold more easily and their yield fell more than two percentage points at auction to 5.62 percent -- far below the euro era record of 7.89 percent that Italy paid to sell the same bond at the end of November. Reflecting acute market anxiety about lending to Italy, that was more than it cost to sell 10-year paper at the same auction.
Since then the ECB has let banks borrow all they sought at its first-ever tender of three-year funds, helping demand for short-term debt.
Italian six-month borrowing costs halved at an auction on Wednesday, following a similarly dramatic drop in Spanish short-term yields on the eve of the ECB's tender.
But there is little evidence that the ECB money has found its way to longer-term bonds of troubled debtors such as Italy.
"The genuine pressure on Italy is still tremendous, despite bold ECB actions that have given (short-term debt) a big boost," said David Schnautz, a rate strategist at Commerzbank in London.
Italy raised nearly 18-billion euros this week. The sales will settle in January and help towards the Treasury's challenging gross funding target of around 450 billion euros for next year.
In a push to keep investors buying Italian debt, a new technocrat government in Rome outlined on Thursday plans to tackle Italy's chronic low-growth problems through long-delayed liberalizations.
Monti said he would present the new measures to its European Union partners at the end of January and made clear he expected more efforts at the EU level towards solving the bloc's debt crisis.
Markets look with concern at some 91 billion euros of Italian bonds coming due between January and April.
While Italy can count on strong domestic support such as from retail investors at its short-term debt sales, its longer-dated bonds are more reliant on foreign buyers, giving a clearer picture of the market attitude towards the country's debt.