Fears for Italy in Eurozone crisis
Italy’s borrowing costs have risen above Spain’s for the first time in more than a year, pushing European leaders to interrupt their holidays and look for a response to deepening fears about the health of the eurozone’s third-largest economy.
At the start of Europe’s debt crisis 21 months ago, Italy was rarely grouped with the weaker members of the single currency zone, such as Greece, Ireland and Portugal.
Many in the markets thought Spain, with its 20% unemployment rate, was vulnerable.
But the emergence of Italy as a potential victim over the past few weeks has highlighted just how vulnerable the eurozone is.
The yield on Italy’s 10-year bond stands at 6.09%, ahead of Spain’s equivalent of 6.04% – though both are lower than the euro-era highs earlier in the week and markedly below where they were at the start of the day, they are still not far from the levels that forced Greece, Ireland and Portugal to seek international financial help.
Worries that Italy and Spain may be next in line led German Chancellor Angela Merkel, holidaying in the Italian Alps, and French President Nicholas Sarkozy, on the French Riviera, to take time out for a phone conference on the eurozone crisis.
Spain’s Prime Minister Jose Luis Rodriguez Zapatero is also set to have talks with Mr Sarkozy.
Their options to what a leading EU policymaker described as “incomprehensible” movements in the markets appear limited.
Even a better than expected US jobs report today failed to ease the pessimism that has gripped investors over the past few weeks.
It’s only been two weeks since eurozone leaders agreed to expand the powers of its €440bn rescue fund that helped bail out Greece, Ireland and Portugal.
The fund will be able to buy government bonds and bail out banks, but the new powers will not be in place until parliaments approve the changes in September.
Analysts also warn that the fund is currently not big enough to rescue Italy, whose debt amounts to 120 % of economic output, around double that of Spain. Only Greece has a bigger proportion to service in the eurozone.
Markets have put increasing pressure on Italy because of its chronically weak growth and a general lack of confidence in Prime Minister Silvio Berlusconi’s ability or willingness to push through politically difficult measures to make the economy more productive.
Analysts at Rabobank International called the current fund “hugely inadequate” to cover Italy and Spain, not least because it would lose the pro-rated contributions those countries make if they needed to be bailed out with loans.
They calculated the fund would need €665bn to cover Italy’s funding needs for three years.
