The debt crisis engulfing Italy and Spain

The eurozone debt crisis has engulfed Italy and Spain. Italian prime minister Berlusconi's fall out with his finance minister, and revelations of Spain's autonomous regions sitting on piles of undisclosed debt, have sent borrowing costs soaring.

"We are now in the most critical phase of this crisis," says Nicholas Spiro, founder of Spiro Sovereign Strategy. The contagion has engulfed heavyweights Spain and Italy. The latter, an economy around the same size as Britain, accounts for a sixth of eurozone output with a GDP of $2trn. Spain's GDP is $1.2trn.

Early this week both Italian and Spanish ten-year bond yields jumped to euro-era highs of more than 6% (reflecting plummeting prices), and hence a sharp rise in Italy's implied borrowing costs. This 6% "is too close for comfort to the 7% level beyond which investors become reluctant to fund sovereign borrowers", says Lex in the FT. Shares in Italian banks (which, as Patrick Hosking of The Times points out, "hold heaps of Italian bonds [and] would struggle if these bonds were to fall much more") have slumped.

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