Italy to test bond market amid political turmoil

FRANKFURT, German (AP) — Italy is facing a test of its ability to borrow money at affordable rates after an inconclusive election that has raised fears that Europe's government debt crisis will flare up again.

The treasury is selling up to €4 billion ($5.2 billion) in 10-year bonds Wednesday and up to €2.5 billion in five-year bonds in what UniCredit analysts are calling a "challenging environment."

Borrowing costs are a key factor as the group of 17 European Union countries that uses the euro tries to contain its problems with too much government debt and slow economies. High interest costs reflect increasing concerns about a country's ability to pay its debts — and can add to the burden on its finances. Markets and politicians are watching to see if Italy's bond interest rates rise in light of the election results — in which no one group won enough seats to form a government.

Italy's 10-year bond yielded around 4.86 percent ahead of the auction, up around 0.4 percent from before the election but well below 7 percent levels at the height of the crisis.

Europe's debt crisis has eased since after the European Central Bank offered to buy the government bonds of indebted countries, if they ask for bailout credit from the eurozone rescue fund and agree to take steps to reduce their deficits. No bonds have been bought, but the mere existence of the program has lowered borrowing costs for Italy and Spain and lowered fears that a country might default.

The problem is that the parties that won most of the votes in Italy's election reject the austerity policies of Prime Minister Mario Monti. That would make it harder for Italy to use the bond purchase program if it is needed and make it less likely it could serve as a backstop if borrowing costs rise sharply.