Italy Borrowing Rates Surge to Record High; End of Berlusconi?

The pressure on Prime Minister Silvio Berlusconi has only intensified as the borrowing rates on Italian government bonds have soared to a record high on Monday.

The yield on Italy’s 10-year bonds reached as high as 6.66 percent -- an all-time high during the euro era – suggesting Europe’s third biggest economy has reached a point of no return and might require a bailout.

Moreover, the spread between Italian and German 10-year government bond yields expanded to 488 basis points during Monday’s trade, the widest such gap in sixteen years.

The data suggests that the market does not believe Italy can repay its huge debt.
Robert Peston, BBC’s business editor, commented: “That [Italian borrowing rate] is dangerously close to an unaffordable interest rate for a public sector that has debt equivalent to 120 percent of GDP, well above what economists see as healthy, and which will have to borrow 300 billion euros next year alone.

After Greek Prime Minister George Papandreou agreed to step down after pushing through a draconian rescue package, the center of gravity of Europe’s spiraling financial crisis may now be shifting to Italy from Greece.

Of even greater urgency, Berlusconi faces a vote on public finance on Tuesday in Rome. Opposition lawmakers, who have long demanded Berlusconi step down, are preparing a no-confidence vote.

Rumors are swirling that the Prime Minister may soon resign – although Berlusconi denied such reports, according to the ANSA news agency.

This may be the beginning of the end for Berlusconi, Richard Hunter, head of equities at Hargreaves Lansdown in London, told BBC.

We're talking about a completely different animal when it comes to Italy [versus Greece]. Greece is responsible for 2 percent of [the eurozone's] GDP whereas Italy is the third biggest economy behind Germany and France.

Similarly, Gary Jenkins at Evolution Securities told the Guardian newspaper: There has been a lot of speculation that a different leader would lead to a sharp retraction in Italian bond yields. That might well be the case in the short term but considering the starting debt position, the economic outlook and the general lack of confidence in Italian debt it promises to be a challenging period of time for any Italian leader.”

A bailout of Italy would be devastating for the Eurozone, even with the recent agreement to expand the size of the European Financial Stability Facility (EFSF).

Peter O'Flanagan of Clear Currency in London told the Guardian newspaper: The current feeling is that Italy is too large to bail out with the current mechanisms in place, should Greek-like turmoil spread to Italy.”

EU finance ministers will meet on Tuesday, ostensibly to discuss the latest developments in Greece, but will likely focus more on the mounting crisis in Italy.