Business, Finance & Economics

Italian debt hits record high


In this photo illustration a Greek flag is covered with one Euro coins on October 4, 2011 in Berlin, Germany.


Sean Gallup

Italy's cost of borrowing has hit a record high, following news that Prime Minister Silvio Berlusconi will resign once budget reforms are passed.

The yield on 10-year government bonds reached more than 7 percent, the highest since the Euro was founded in 1999, raising fears that Italy will be the next victim of the debt crisis.

According to BBC News, the 7 percent level is viewed as unsustainable and is considered the level at which countries are at risk of being unable to fund themselves; Portugal, Greece and the Irish Republic were forced to seek a bailout at that point.  

According to the Wall Street Journal, this is the latest sign that investors are fast losing faith in the world's third-biggest sovereign-bond market. Economists say that yields may have risen far higher in the past week if not for heavy bond-buying by the European Central Bank. 

The pricing, which is set by traders who are selling Italy's bonds, hit 7.3 percent by mid-morning.  

"It's like tectonic plates," one desk analyst told CNN. "You have this pressure and then it breaks."

According to Olli Rehn, the Economic Affairs Commissioner, the situation in Italy is "very worrisome," BBC News reported.  

A team from the European Union is due in Rome on Wednesday to begin monitoring Italy's plans to cut its debt burden, the Wall Street Journal reported.

"The instability of Italy's political situation could increase market anxiety levels before rates got even close to double digits, and at 7 percent or 8 percent, Italy could find it was unable to raise sufficient money on the bond market," said Laurence Boone, European economist at Bank of America Merrill Lynch to the Wall Street Journal. "In short, a confidence issue could turn into a liquidity issue." 

The Guardian reported that Italy's national debt is 2.7 times as large as Ireland, Greece and Portugal combined. 

And because more than €120bn of long-term government bonds mature in 2012, along with €180bn of short-terAm debt (aka bills). So to 'roll over' this debt, Italy needs to be able to borrow the same amount from international investors (on top of any deficit it runs next year).

According to Gary Jenkins of Evoluntion Securities, it isn't affordable for the EU and IMF to bail Italy out, and will cost 1.4 trillion euros.