Fears that Italy could be the straw that breaks the back of the eurozone are mounting, as yields on Italian bonds climbed to record euro-era highs. Speculation has shifted towards the country as being the next to require a bail-out, with a political crisis in Rome making it increasingly unlikely the government will be able to deal with its debts.
What the commentators said
The eurozone crisis is making a strong comeback just days after Greece’s second bail-out, said Nikhil Kumar in The Independent. Both Italian and Spanish bonds are “getting unsettlingly close to the 7% threshold that left Greece, Ireland and Portugal in need of emergency funding”. In particular, Italy now looks as though its recent €48bn deficit reduction package will not be sufficient to dig its way out as the cost of servicing its debt rises. Given that the country is the eurozone’s largest debtor, with a national debt of €1.9trn, a crisis here would be on an entirely different scale to those that have already compelled the three smaller economies to seek external support.
In response to the threat of contagion, eurozone governments want to grant sweeping new powers to their rescue fund, said Josh Chaffin in the FT. These include “the power for the European Financial Stability Facility to repurchase bonds of stricken governments and extend them short-term lines of credit and cash to help recapitalise ailing banks”. Hopefully, this would enable policymakers to intervene early in a crisis and prevent it from getting out of hand.
“So what are the eurozone leaders waiting for?” asked The Guardian’s Nils Pratley. “Surely it’s time to roll out the heavy weapons, zap the speculators and contain contagion.” But the eurozone establishment is in no position to act, however much it wants to. That Brussels declaration was clear. “Ratification by member parliaments is required before the EFSF, the fighting fund, can storm into the market and start buying bonds.” Given the speed of European bureaucracy, this may not happen before the end of the year. And by that time, it may be too late, said Capital Economics. “By then Italian and Spanish bond yields could be much higher.” During previous legs of the crisis, events have escalated faster than most people expected. “After all, Greek ten-year yields reached 7% just three months after breaching the 6% barrier. In Ireland in Portugal, it took less than two months.”
Given its growing political crisis, Italy might not even have that long. Prime minister Silvio Berlusconi is fighting charges of tax fraud, corruption and sex offences, corruption allegations against an aide threaten to drag in finance minister Giulio Tremonti and the government’s coalition partners are openly fighting, said Guy Dinmore in the FT. The impression is of a “paralysed government” – the last thing Italy needs at this time.