Italy seeks bigger euro fund after tough debt sale

Italian Prime Minister Mario Monti sought reinforcement for the euro zone's bailout fund and pledged new efforts to boost the economy after a disappointing bond auction underlined the threat to the country's shaky public finances.

Investors demanded a yield of nearly 7 percent on 10-year paper at the auction of medium- and long-term bonds, down from the record highs seen last month but still unsustainable given the 450 billion euros ($580 billion) that Italy needs to raise through debt issuance in 2012. An unprecedented European Central Bank injection last week of nearly half a trillion euros of cheap funding for banks eased pressure at a short-term Italian debt auction, but longer-dated bonds still pose a challenge.

Monti put a brave face on the auction result, which analysts described as "slightly positive" or "average" at best. "Auctions held yesterday and today went rather well, this is encouraging but the financial turbulence absolutely isn't over," Monti said during a traditional end-year press conference.

Italy, the euro zone's third largest economy, remains at the centre of the debt crisis that began in Greece two years ago and its borrowing needs could overwhelm the bloc's financial defenses if it were forced to seek an international bailout. "A lot of work remains to be done but from this point on, this work has to be done in Europe above all," Monti said. He said the European Financial Stability Facility, the bailout fund set up by euro zone governments, needs "significantly greater" resources but refused to quantify how much more was required.

Monti promised to outline a first package of growth measures to European partners next month and said the emphasis would be on liberalizing the economy, boosting competition and overhauling the jobs market, though he did not give details.

The measures will follow a 33 billion euro package of cuts and tax hikes aimed at balancing the budget by 2013 which was passed by parliament last week but which has been criticized for weighing too heavily on Italy's already sickly growth prospects.

Monti said he was aware that the austerity package had "many disadvantages" but said budget discipline was needed to restore confidence in Italy's public finances. However he added that European policy had to focus increasingly on growth.