Italian debt passes 7% death point

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.

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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