In one of the most significant days on the international bond markets in living memory yields on Italian 10-year debt breached the 7% mark, the point at which Greece, Portugal and Spain had to be bailed out by the other Eurozone countries and the International Monetary Fund.
The difference this time is that Italy is a G8 country with total gross domestic product (GDP) of over $2 trillion. This is now the endgame for the Euro debt crisis as the structure of the Euro currency is tested perhaps to destruction.
Both Reuters and Bloomberg are reporting unnamed sources as confirming the European Central Bank (ECB) has entered the market for Italian bonds, the equivalent of providing a pain killer to the debt agonies of the third biggest Eurozone economy.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How much effect this intervention was having is a moot point because as of 16:59 UK time Italian 10-year yields had reached 7.246%, 47.8 basis points up on the day.
The issue is not simply one of debt (although at 120% of GDP Italy has a world class debt mountain) but also one of politics as the market no longer believes the current government can deliver the reforms needed to restore credibility. Silvio Berlusconi is a busted flush, the Italian Prime Minister has pledged to resign after a parliamentary vote on the 2012 budget.
That budget will include severe cuts and changes to labour laws that may be deeply unpopular. The market didn't think Berlussoni had the authority or the will to enforce the legislation, the fear now is that neither does the remnants of his governing coalition.
Would you lend money to a country growing at barely better than 0.5% per year which faced interest rates of over 7%? No? Nor would anyone else. The unanswered question now is what is Europe going to do about this fallen giant, where will the money come from to bail it out and do Europe's leaders have the will to pay the price.
BS
-
FTSE 100 hits record highs – why is it rising and will we see more gains?Advice UK equities have been described as unloved for a long time but as the FTSE 100 hits new highs, we explain if now is the time to buy British.
-
How to invest in copperIt may be time to invest in copper as the red metal appears poised for a big jump. Dominic Frisby looks at what should investors should buy
