All eyes on Italy as borrowing costs surge
AS Greece plunged Europe back into crisis yesterday, all eyes in the markets turned to Italy.
Italy must borrow €400bn in the coming year just to repay bonds as they fall due. It means the country is now the weakest link in the euro chain.
Yesterday, Italy's borrowing costs surged to a record high of above 6pc in chaotic trading.
They were prevented from worsening further only because the ECB stepped in to stabilise the situation by buying around €5bn of the Italian bonds.
Italy must now pay 4.5pc more to borrow in the markets than Germany. When Irish and Portuguese debt-costs hit that level over German borrowing costs, clearing houses imposed an extra cost on deals which involved bonds from these countries.
Italy is now moving in the same trajectory seen before the Irish and Portuguese bailouts, but on a far bigger scale.
Italy has a €1.6 trillion national debt. If rising borrowing costs drive it from the markets, the fall-out would be felt globally.
Unlike Greece or Ireland, the Italian government is a cornerstone of the global bond markets. Only the US and Japan sell more bonds each year. Italian government debt is running at around 120pc of the size of the Italian economy.
Borrowing costs of 6pc, combined with such a massive debt burden, are unsustainable, even though the country has a far smaller budget deficit than Ireland or Greece.
The €500bn in Europe's bailout funds is far too little to be of any meaningful help if that happens.
Last week, Italian Prime Minister Silvio Berlusconi was heavily criticised by fellow eurozone leaders for failing to tackle the crisis in his national finances.
Now, as the Greece bailout appears to be unravelling, Italy threatens to move centre stage, taking the debt crisis into yet another explosive chapter.