When Italy issued 3 billion euros in bonds last week at an interest rate of more than 6 percent, it was about 1.5 percentage points higher than it had to pay as recently as last summer — and the most expensive 10-year money it had borrowed since joining the euro a decade ago.
That cost — extracted by financial markets increasingly doubtful about Italy’s ability to repay its loans — shows just how hard it is for indebted European countries to escape their raging financial crisis. Even as they frantically cut back their debt mountains through austerity measures, the debt servicing costs are piling up.
In Italy’s case, the extra bond yields are adding as much as 3 billion euros (about $4.1 billion) in additional interest payments annually, estimates Tobias Blattner, a former economist at the European Central Bank who is an economist at Daiwa Securities in London.
“That is a lot of money for someone trying to cut their debt,” he said. “Each day the situation deteriorates and you have to go back for more austerity measures to match them.”
The interest rates on Italian debt fell back on Thursday after Greece called off its proposed referendum on the terms of its planned bailout, and the European Central Bank cut interest rates, announcements that cheered financial markets across Europe and the United States.
The Euro Stoxx 50 index, a barometer of eurozone blue chips, closed up 2.5 percent. The German DAX was up 2.8 percent and the CAC 40 in Paris rose 2.7 percent. The FTSE 100 index in London rose 1.1 percent.
In the U.S., the Standard & Poor’s 500 index was up 1.9 percent, or 23.25 points, at 1,261.15, and the Dow Jones industrial average gained 1.8 percent, or 208.43 points, at 12,044.47. The Nasdaq rose 2.2 percent to 2,697.97.
Energy, industrials, technology and materials each rose about 2 percent, while financial stocks were up 1.12 percent.
The latest developments in Greece were seen as supportive for stocks, but “the big thing was the European rate cut and that is what is driving the market,” said Doug Cote, chief strategist at ING Investment Management. “Investors are going to start nibbling around and going back to risk.”
The Italian 10-year yield — rising to 6.352 percent on Thursday before falling back to 6.167 percent — remains uncomfortably high, and could move higher again, analysts said. Facing a confidence vote on Friday, the Greek government may still be forced to call for a new election. That would again call into question the entire rescue package for indebted European countries that was agreed to last week at a summit meeting in Brussels.
“Papandreou still has to face the confidence vote,” said Win Thin, currency strategist at Brown Brothers Harriman in New York. “If he passes, he could still reintroduce the referendum. If he does not pass it, then the opposition is not happy about the current deal. It gets politically messy.”