The Corner

Contagion

Reuters reports on today’s Italy jitters:

Italian government bonds and stocks fell sharply on Monday as investors cut their exposure to Italy on fears the euro zone’s third biggest economy could be sucked into the bloc’s sovereign debt crisis.The premium investors demand to hold Italian paper rather than low-risk German debt rose to a new euro lifetime high, pushing up financing costs for Italy — which has one of the highest public debts in the world — and its banks. With euro zone finance ministers and officials due to meet later on Monday to discuss a second bailout for Greece and the worsening situation in Italy, the spread on the 10-year Italian BTP widened to 290 basis points over Bunds. The benchmark bond’s yield climbed to 5.565 percent — the highest in 10 years. The cost of insuring Italian debt against default also jumped to a new record high.

Over at the Daily Telegraph, Andrew Lilico makes the case for a little calm:

The euro was introduced from 1 January 1999. In the subsequent eight years up to 2007 (before the current recession), Italy grew at an average of a little over 1.6 percent per year, whilst Germany grew at a little over 1.7 percent per year. In the seven years leading up to the introduction of the euro (1992-98), Italy had grown at an average rate of a little over 1.3 percent per year, whilst Germany had grown at an average of a little over 1.5 percent per year. Italian growth both in absolute terms, and relative to Germany, accelerated slightly as a euro member.

As it joined the euro in 1999, Italian government debt was about 115 percent of GDP. By 2007 that had fallen to 104 percent of GDP. Italy did not use its Eurozone membership to run up large debts, indeed it uses the good times to run its debts down, not up – albeit by less than, say, Belgium, which cuts its government debt from 117 percent to 84 percent. (By way of further reference, German government debt had risen from 60 percent to 65 percent of GDP, and French debt from 59 to 64 percent.) Even during the recession itself, whilst deficits elsewhere rocketed into double figures, Italy’s peaked at 5.4 percent in 2009 (less than France’s 7.5 percent).

The problem is that the very nature of the eurozone–that all its members’ debt is effectively denominated in a ‘foreign’ currency–means (as discussed here) that short-term crises of confidence can quickly become something far worse.

Meanwhile, Ambrose Evans-Pritchard, the Daily Telegraph’s most reliable bearer of bad tidings, notes this:

The Italian treasury has to roll over €69bn (£61bn) in August and September; it must tap the markets for €500bn before the end of 2013. The interest burden on Italy’s €1.84 trillion stock of public debt is about to rise very fast…

…Spanish yields punched even higher, through the danger line of 5.7pc. The bond markets of both countries are replicating the pattern seen in Greece, Portugal, and Ireland before each spiraled into insolvency. And the virus is moving up the European map. French banks alone have $472bn (£394bn) of exposure to Italy and $175bn to Spain, according to the Bank for International Settlements.

And then, of course, there is the special twist added by the Mad Hatter logic of a one-size-fits-all currency:

[The European Central Bank] chose last week of all moments to raise interest rates again and kick Spain in the teeth. It did so knowing that the one-year Euribor rate used to price more than 90pc of Spanish mortgages must rise in lock-step. As one Spanish commentator put it, the Eurotower in Frankfurt should be torn down, and salt sown in the ground.

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