Italian markets hammered as Europe's debt crisis spreads

The cost of Italian government's long-term debt soared to a ten-year high as Europe's financial crisis spread to the continent's third-largest economy.

The yield on a ten-year Italian bond jumped 41 basis points, by nearly half a percentage point, as investors increased their bets that Italy will be the next country that will be forced to restructure its debt.

Ballooning debt

The higher bond rate means the Italian government now must pay 5.68 per cent in interest to borrow money for ten years. By contrast, investors are willing to lend the German government for the same term at 2.67 per cent, or less than half the Italian rate.

Soaring interest charges are also indicative of the jaundiced eye which the financial market is now casting at Italy.

Italy has total debt in the range of $2.2 trillion US, approximately 25 per cent of which must be refinanced within the next 18 months. And analysts are concerned that lenders might not be willing to allow Italy more money.

"Even with its bloated debt, Italy has been able to distance itself from other European bailout recipients thus far. But the recent sell-off of nation's sovereign debt...begs the question of whether Italy is the next boot to drop," said Emanuella Enenajor, an economist with CIBC Economics.

Growing pressure

Clearly, international lenders have developed a similar mindset in recent weeks.

The Italian stock market has traded down 23 per cent since the beginning of May and the cost of insuring Italian debt against a default — a relatively common practice — has hit an all-time.

These indicators reinforce the view that financial markets believe Italy's fiscal woes might pressure the government to seek assistance from the European Union, analysts noted.

Already the EU and the International Monetary Fund have extended monetary help to Greece so that country can handle its massive borrowings while Ireland and Portugal loom as potential candidates for such assistance.

In return, the Greek government recently imposed severe spending cuts on its population in order to get cash to re-finance debt due in July.

Now, Italy and Spain are getting pushed to install a similar program of spending cuts, asset sales and tax hikes in order to stave off a financial default.