The Corner

Uh Oh

Via the BBC:

Italy’s cost of borrowing has touched a new record, a day after Prime Minister Silvio Berlusconi said he would resign once budget reforms are passed. The yield on 10-year government bonds reached more than 7%, the highest since the euro was founded in 1999. Investors fear that Italy could become the next victim of the debt crisis. The 7% level is widely viewed as unsustainable and was the point at which Portugal, Greece and the Irish Republic were forced to seek a bailout. In comparison, Germany’s implied cost of borrowing for one year is just 0.24%.


The BBC’s business editor Robert Peston said: “No one wants to lend to a country when that country would use the loan to pay the interest on previous loans – that’s throwing good money after bad.”

Some things to remember:


Italy would not be facing these questions about its ability to repay its debt if it had kept its own currency.


As things stand, the EFSF (the Eurozone’s bailout fund) is not large enough to rescue Italy. Once it has been resolved how (in detail) it will be leveraged, and once it has found investors willing to lend to it (would you?), that might change, but that’s going to take time, and Italy may well not have the time.

The European Central Bank is holding the line for now, but it to be able to stop Italy’s liquidity crisis becoming a solvency crisis, markets have to know that the ECB has the ability to turn on the printing presses, something which (for understandable reasons) Germany is resisting.



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