Bond market developments are deep concern, says Barroso

Luxembourg Prime Minister and Eurogroup president Jean-Claude Juncker (right) meets Italian Finance Minister Giulio Tremonti
Image caption Talks have taken place in Luxembourg between Italy and the EU

European Commission President Jose Manuel Barroso has described the bond markets' treatment of Italy and Spain as "a cause of deep concern".

Yields on Spanish and Italian bonds have hit euro-era records this week.

Italian finance minister Giulio Tremonti has held talks with Jean-Claude Juncker, chair of the eurozone countries' finance ministers group.

Italian Prime Minister Silvio Berlusconi told parliament the country had "solid economic foundations".

"Developments in the sovereign bond markets of Italy and Spain are a cause of deep concern," Mr Barroso said.

"These developments are clearly unwarranted on the basis of economic and budgetary fundamentals in these two member states and the steps that they are taking to reinforce those fundamentals."

Yields on Spanish and Italian 10-year bonds hit their highest levels since the launch of the euro on Tuesday, meaning that it would cost both countries' governments more to borrow money if they wanted to.

Yields rose again on Wednesday before falling back somewhat.

The Italian 10-year bond was yielding 6.02% while the Spanish 10-year bond was at 6.14%.

Many analysts see a bond yield above 6% as unsustainable.

"The upward march in Spanish and Italian bond yields is evidence of the relentlessness of the sovereign debt crisis," said Jane Foley, an analyst at Rabobank International.

Political problems

The problems come less than two weeks after eurozone leaders agreed a second bailout for Greece, which was partly aimed at preventing the sovereign debt problems spreading to other countries.

Portugal and the Irish Republic have also received bailouts to help them cope with their debt problems.

Italy, which is the eurozone's third-largest economy, has so far managed to avoid sovereign debt problems, despite having one of the highest debt-to-GDP ratios in the eurozone at 120%.

But Italy's economy is twice as big as Greece, Portugal and the Irish Republic combined, so a bailout would probably be unaffordable.

Concerns have been exacerbated recently by political problems.

The Italian parliament approved a 43bn-euro ($62bn; £38bn) austerity package last month, but there is some doubt about whether Mr Berlusconi's government can implement the cuts.

"Despite numerous attempts, the European authorities have still not done enough to satisfy a sceptical bond market and the debt crisis looks far from over," said Juliet Tennant, economist at Goodbody Stockbrokers in Dublin.

As worries about the southern European economies grow, investors have been less keen to buy their bonds, which has meant the prices have fallen.

The head of Italy's treasury, Vittorio Grilli, is on a tour of Asia to try to drum up interest in buying Italian bonds, according to sources quoted by the AFP news agency.

Half of Italian bonds are owned by Italian institutions and individuals, while most of the rest are held by investors elsewhere in Europe.

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