Euro under pressure as EU summit optimism fades

FRANKFURT, Germany — The euro slid to an 11-month low and borrowing costs spiked Wednesday for heavily indebted Italy, as economic realities dispelled the last wisps of optimism left about an EU deal aimed at containing Europe's debt crisis.

The market verdict — that Europe's debt problems are still unsolved — comes after five days of accumulating questions about whether the deal's new limits on debt and added contributions to the International Monetary Fund will take full effect.

There's also the recognition that last week's summit deal:

— Doesn't reduce existing government debt levels;

— Doesn't do much to promote the long-term growth that would shrink those burdens;

— And didn't create a financial backstop big enough to convince markets that all European countries will pay their debts no matter what.

The euro traded below $1.30 for the first time since January 12, hitting a low of $1.2973. Some of that is loss of confidence in the assets of the 17 nations using the euro, but it's also the result of two quarter-point interest rate cuts from the European Central Bank. The cuts lower the return on euro-denominated holdings and can induce investors to move money elsewhere.

One of the reasons why the euro not fallen further against the dollar this year, despite the pressures heaped on it by the debt crisis, is that interest rates in Europe have been so much higher than those in the U.S., where the Federal Reserve has kept its main interest rate near zero percent.

That interest rate differential has helped offset the concerns investors naturally felt as the European debt crisis raged and threatened to undermine Europe's banking system and the currency itself.

At Italy's last bond auction of the year, investors demanded even more money to lend to the eurozone's third-largest economy. Italy paid 6.47 percent interest to borrow €3 billion ($3.95 billion) for five years at a bond auction, up from 6.30 percent just a month ago.

The higher rates reflected investors' fears over the inadequacy of last week's agreement to keep eurozone governments from piling up more debt in the future. Italy has a staggering €1.9 trillion ($2.5 trillion) in outstanding debt, and its economy is too large for Europe to bailout, like smaller nations Greece, Ireland and Portugal have been.