Italy's Borrowing Costs Drop - NYTimes.com MILAN - Five- and 10-year borrowing costs for Italy fell to their lowest level since October 2010 at an auction Monday after the new prime minister, Enrico Letta, named a coalition government, ending two months of political stalemate. The Treasury sold all of its planned €3 billion, or $3.9 billion, of 10-year bonds at 3.94 percent, well below the yield of 4.66 percent it paid at a similar sale one month ago. Rome also issued all the €3 billion of five-year bonds it wanted to place, paying a return of 2.84 percent, down from 3.65 percent paid at an auction at the end of March. But the rating agency Moody's Investors Service warned that the economic and political backdrop remained complex, adding that the new government faced big challenges in pushing through economic changes. "We cannot yet rule out Italy will end up asking for help from the European Central Bank and the European Stability Mechanism," Dietmar Hornung, a senior credit officer at Moody's, was quoted as saying in the Monday issue of the Italian daily La Repubblica. "We will have to verify the commitment of the new government and its ability to resolutely pursue the huge structural reforms the country needs to improve its creditworthiness," he said. For now the situation remains difficult. Italian bond yields had topped 7 percent at the height of the political crisis last autumn, leading to fears that borrowing costs were becoming unsustainable and that Rome would need to ask for a bailout. Italian stocks rose Monday, with the MIB index in Milan up 1.4 percent by mid-afternoon in Europe. Other European benchmarks also were higher. Investors credited the formation of the new government with the return of confidence in Italy as an investment. "It's clearly an authoritative government," said Andrea Cuturi, vice chairman of Anthilia Capital Partners. Letta is competent and has experience. The key issue is, however, how long will this government last and what it will be able to do. This will become clearer in the coming weeks. An inconclusive general election at the end of February left Italy, which has the euro zone's third-largest economy after those of Germany and France, at the mercy of three main political forces, threatening investor confidence and holding up efforts to end a recession. Mr. Letta, 46, a moderate center-left politician and one of the youngest Italian prime ministers ever, was able to put together a cabinet after striking a deal with the center-right People of Freedom party, led by former Prime Minister Silvio Berlusconi, and with the centrist Civic Choice Party, led by another former prime minister, Mario Monti. Moody's said Friday that it had kept Italy's sovereign debt rating at Baa2 because of the reasonably low current cost of funding and the fact that the Italian budget would be in surplus if debt service were excluded. But the rating agency maintained its negative outlook for Italian sovereign debt because of the prolonged economic crisis. Michael Hewson, analyst at CMC Markets, said the formation of the government was "a positive development," but he added that he was "not constructive" on European equities, which he said were "still well below the highs." "To be quite honest, while you could argue that Italy's got some scope to go up, that's only because it's been sold off," he said.