Stocks slump as Italian bond yields rise, casting doubt on Europe rescue

Another jump in Italian government bond yields is raising fresh doubts about Europe’s latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down 140 points, or 1.1%, to 12,091 at about 11 a.m. PDT, after surging 3.6% last week.

Most European stock markets were down between 2% and 4% after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose to 6.09% Monday, up from 6.02% on Friday and the highest since early August. Two-year Italian bond yields surged to 4.99% from 4.75% on Friday and the highest since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, key to the strategy was halting the “contagion” before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund -- known as the European Financial Stability Facility -- to $1.4 trillion by leveraging it.

The fund is expected to eventually issue guarantees on bonds issued by deeply indebted countries, particularly Italy. The goal: bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work -- or they believe the Europeans will drag their feet on implementing it. Although the broad framework of the rescue was announced on Thursday, many of the details were still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of sports car maker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein-in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership of the euro are all at risk,” he said.

-- Tom Petruno

Photo: Italian Prime Minister Silvio Berlusconi. Credit: Remo Casilli / Reuters