Fears of debt contagion grow as Italy enters bail-out zone
ITALIAN 10-year bonds shot past the ‘unsustainable’ 7pc barrier today propelling the world’s eighth largest economy into bail-out territory and prompting fears for the future of the eurozone.
Spain was showing signs of contagion as 10-year bond yields rose to 5.8pc.
There were also concerns about French bond interest rates at 3.2pc – 1.47 percentage points above the German rate.
Italy faces a tough task tomorrow – it needs to borrow €5 billion for 12 months on the markets and the interest rate on one year debt has soared to more than 8pc.
The European Central Bank was buying up Italy’s debt as International Monetary Fund chief Christine Lagarde warned that the global economy faces the risk of a “lost decade” of little or no growth due to financial instability.
The new developments signal that it is game over for Italy’s economic sovereignty as the markets responded to the announcement of premier Silvio Berlusconi that he intended to step down – but not just yet.
Respected economist Nouriel Roubini tweeted: “Italian yields at Ponzi levels: having to borrow more just to finance the interest on debt leading to vicious unsustainable debt dynamics. Berlusconi: dithering while Rome is burning. He would rather let Italy burn to the ground rather than leave power.”
German Chancellor Angela Merkel has said that the situation in Europe is so unpleasant that it's time for a breakthrough.
Italian President Giorgio Napolitano has called for an immediate commitment to economic reforms to restore confidence in panicked financial markets, which have pushed Italy's borrowing costs to potentially disastrous levels.
“Italy must regain credibility and confidence as a country for us first of all to get out from a very dangerous squeeze on financial markets on our public debt and on the conditions facing our banking institutions. This requires an immediate and sustained commitment to the management of our public debt,” he said.
British Prime Minister David Cameron said that countries pulling out of the Euro would be “very painful”.
He said that is would not be right for the IMF and non-eurozone members to contribute to the eurozone bailout if the eurozone was unwilling to take tough decisions.
Reuters reported that the ECB has been buying up 10-year bonds in an effort to reduce Italy’s interest rate.
Bond yields rose from 6.8pc to 7.4pc in just over an hour this morning.
If Italy was to pay 7pc interest on the whole of its €1.9 trillion debt it would add a crippling €70 billion a year to its interest bill.
Ireland lasted 15 days after our bond yields hit 7pc. Greece needs a bail-out in 13 days while Portugal held out for 49 days.
Swedish finance minsiter Anders Borg said that Italy should consider selling state assets to help reduce its debt burden.
The difficulty for Italy is that the eurozone’s bailout fund is not large enough to cope with Italy’s debt levels.
Uncertainty over Italy’s political future weighed on markets as analysts said it was both necessary and impossible for the world’s eighth largest economy to be bailed out.
Daily Telegraph economics editor Phil Aldrick tweeted: “Half Italy's national debt is held domestically. Thing is, there's lots of evidence showing Italians are moving their money to Swiss banks.”
The FTSE 100 Index was 1.7pc lower as Italian 10-year bonds soared past the 7pc mark to the same unsustainable levels that pushed Ireland and Portugal into a multibillion bailout from the EU and IMF.
Kathleen Brooks, research director at Forex, said the market may be reacting to the potential for "a fractious coalition government getting into power", which could worsen Italy's fiscal situation.
Ms Lagarde warned that the global economy faces the risk of a "lost decade" of little or no growth due to financial instability and Asian economies should take steps to guard against the impact of a downturn.
She said Asian economies are relatively strong but need to be "prepared for any storm" and Asian governments that have tightened monetary policy to fight inflation should "pause a little bit".
Barclays said Italy is now "mathematically beyond the point of no return".
The deposit charge for investors trading Italian 10-year government bonds has been increased to 11.65pc from 6.65pc - meaning if you want to trade the bonds you have to put down a lot more money to do so, a key risk indicator.
The ongoing uncertainty in Europe continued to weigh on the banking and mining sector, with shares in Royal Bank of Scotland falling 4pc and copper giant Kazakhmys dropping 3pc.
Mr Berlusconi has confirmed he will not run again for office and his hand-picked successor Angelino Alfano will be his party's candidate when Italy holds new elections.
The markets initially posted modest gains after the move, which bolstered hopes for coordinated action on the debt-laden country's austerity drive.
Mr Berlusconi was largely seen as an obstacle to Italy, which is the eurozone's third-largest economy and has debts worth 120pc of national income, pulling itself from a financial mire.
But the uncertainty over when the election will take place and the position any new government may take troubled investors, with the Cac-40 in France and Germany's Dax dropping more than 2pc.
Ben Critchley, sales trader at IG Index, said: "The Italian-driven rally has stumbled as reality gets a foothold in equity markets."
Meanwhile, uncertainty in Greece continued to weigh on the markets as the debt-laden country is yet to select a replacement for former Prime Minister George Papandreou, who stepped down amid increased criticism over his handling of his country's part in the debt crisis.
It is understood that he will offer his resignation today.