Risk premium hits new record on Italian ills

Spain's risk premium hit a new euro-era record high on Monday as the country suffered contagion from Italy, which was forced to sharply increase rates at a bond auction on the same day.

The spread between the yield on the benchmark 10-year government bond and the German equivalent hit an intraday maximum of 433 basis points before closing just below that at 432 basis points, up 36 basis points from Friday. The previous record high of 424 basis points was reached on Thursday of last week.

The improvement in market sentiment sparked by the respective appointments of respected technocrats Mario Monti and Lucas Papademos to lead the reform agendas in Italy and Greece thus proved short-lived.

The Spanish Treasury faces its own primary market test this week when it is looking to auction up to 7.5 billion euros in government debt. While the risk premium hit a new euro-era high, this was not the case for the yield on the 10-year bond which touched 6.095 percent on Monday, below the maximum of 6.311 percent reached in July. That was because the yield on the safe-haven German equivalent has dropped to 1.8 percent, compared with 2.8 percent only four months ago.

The increase in Spain and Italy's risk premiums has taken place despite purchases of the two countries' debt in the secondary market by the European Central Bank, which bought 4.478 billion euros of government debt last week.

The stock markets also suffered on Monday, with Spain leading the rest of Europe downward. The Spanish blue-chip shed 2.15 percent.