November 2nd, 2011
07:01 PM GMT
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London (CNN) – Greece’s future – and that of Europe – is in disarray after the decision by Prime Minister George Papandreou to call a referendum on its bailout. Now Italy’s soaring funding costs are injecting fresh anxiety into the crisis.

Italy is being crushed by investors, who are now insisting on yields of up to 6.4% to invest in its 10-year bonds. Markets regard 7% as a benchmark which, if breached, makes it extremely difficult for countries to fund themselves.

So these levels are now sending red alerts: Italy is flirting with the danger zone. This, over and above the sheer panic and difficulties which would ensue should Greece decamp to the drachma, is a very real problem.

Italy makes up 17% of the eurozone's economy; Greece, Ireland and Portugal combined account for only 6%. Suggestions it may need financial aid would send the markets into a tailspin. It could also suck Spain, the eurozone’s next largest economy, into the bailout vortex.

Last week such fears faded, as European markets cheered the grand bailout plan that would surely save Europe. But Papandreou’s unexpected referendum move Monday blindsided the politicians and the markets. Uncertainty - and the extreme volatility it feeds - is back, and overshadowing this week’s G-20 meeting in Cannes.

Investors are “almost broken,” one desk analyst told CNN. “What we saw yesterday - you can’t make this stuff up. People were blown away. People’s nerves and patience are shot to pieces.” Investors are far less likely to dismiss what in the past may have seemed unthinkable, he added.

Italian Prime Minister Silvio Berlusconi is under pressure from Germany and France to come up with plans to curb the country’s €1.9 trillion in debt, equal to about 120% of its economic output, and boost growth. Its economy has been stagnant for a decade.

Italy has been downgraded by all three major ratings agencies in the last two months, and one austerity measure - to raise the retirement age two years to 67 - prompted the suspension of parliament last week after a brawl broke out between lawmakers.

David Buik, partner at BGC partners, says the soaring bond yields are due, in large part, to Berlusconi's struggle to implement austerity measures. “The Italian coalition is very fragile and Berlusconi is holding on by his fingernails,” Buik says. “The Italian situation has been exacerbated by Papandreou's astonishingly ill-timed, duplicitous and deranged behavior for which he should be universally vilified.”

The magic 7%, however, does not inevitably lead to a bailout. As Buik points out, Greece, Portugal and Ireland bond yields hit double digits before they were bailed.

While Italy is facing issues including a cyclical slowdown, a lack of competitiveness and problems with its electoral system, “strong political action” could counter the headwinds, Societe Generale economists noted last week.

So as the weak eurozone economies stumble under Greece’s shadow, pressure will intensify on the European Central Bank, which has been a vital player in the crisis.

Its controversial role as buyer of eurozone sovereign bonds, a strategy designed to keep funding costs down, could be ratcheted up.

After eight years under Frenchman Jean-Claude Trichet, the bank’s role is increasingly under the spotlight. Italy’s Mario Draghi had his first day in the job Tuesday: With Greece apparently stumbling near the abyss, easing the pain for Italy could be high on his to-do list.

soundoff (19 Responses)
  1. eamon

    "Italy’s Mario Draghi had his first day in the job Tuesday" This guy "worked" for Goldman Sachs and was well aware of the Greek problem (Greece cooked the books with GS´s help)when it gained entry into the EU. No further comment.

    November 2, 2011 at 8:06 pm |
  2. Kenyon Williams

    Honored staff, I think the Europeans better worry about video close-ups of all the jets they are flying from Europe over Oregon down to their Military base in Alamagodo New Mexico more. I'm sure that many people will be concerned about the very large ordnance hanging under many of those planes; which are clearly visible with a 30x camera; Respectfully; Kenyon Williams GIES, Grants Pass Oregon (USA)

    November 2, 2011 at 9:22 pm |
  3. sherman

    You can let this carry you under or bounce up to the top.... but consensus is a lousy way to govern money.

    November 2, 2011 at 10:28 pm |
  4. Davis Bradley

    And this is surprising because? Moody's has been downgrading Greece, Spain, and Italy for the past 3 years to create an impossibly high cost of the debt for the purpose of causing economic collapse in the Eurozone. The result is an improved U.S. economic outlook and the destruction of the Euro as a reference currency. Job well done!

    November 2, 2011 at 10:33 pm |
  5. desert voice (troubledgoodangel or Nathanael)

    The history repeats itself in strange circles. Just looking at Berlusconi I am reminded of Italy under Mussolini. Just put the picture of the Duce by the side, and you will know what I mean. Italy of the thirties was a nation at the mercy of Germany. The "Mussolini" posture that Berlusconi adopts in the picture is not a coincidence. He "feels" like Mussolini felt when Europe was being redrawn ... by Hitler, and later, when he was at the Eagle's Nest. This "bad dream," call it "Europe's nightmare," has roots in globalism! Globalism forced Europe to try to reinvent itself, in order to compete. It chose the euro zone, that was a Trojan Horse! Did not Hitler's Germany pressure Europe, Italy especially, in exact same way? Little wonder that Europe looks to the Communist China for deliverance. I think that Europe should not look that way! rather, she must accept another American Marshall Plan, aimed at rescuing the European Unin at a more convenient price!

    November 2, 2011 at 10:58 pm |
  6. hirst

    Italy is a solid economy that respects payments.

    November 2, 2011 at 11:09 pm |
  7. Europeist

    Italy has a solid economy: it is the second manufacturing country of Europe, second only to Germany, and it is one of the first countries in the world for private savings and investments. Italian families are not indebted as the families of other western world countries. I cannot understand how it can even be compared to Greece.

    November 3, 2011 at 12:14 am |
  8. Mark

    Greece and Italy are the two giants of the past 2000 years . Better yet .. 2000 years ago. Giants, when the rest of the world was living in the wild they had avenues as big as fifth ave (2,000 years ago). Let's don't forget that: they (both) know how to play and they (both) will show what they can do ... mark my words. It will be a surprise? yes I admit that but let's remember that they give the best under pressure and their best will shake the world. China? it's only lots of people treated like animals, today: now how long can THAT work? not long. Again... mark my words.

    November 3, 2011 at 1:04 am |
  9. Sal

    @eamon – The European Council as of May 1999 was responsible for Greece joining the Euro Currency Group.
    They were expected to check the truthfulness of the data shown by Greece. And they did not do it.
    Draghi joined GS some years later when it would have been too late, anyway.

    November 3, 2011 at 4:06 pm |
  10. vinny

    I dont understand you tin foil hat folks who always think there is a conspiracy by Wall Street or your local government to make you miserable. Heres the facts. The facts are these countries are spending much more money they are bringing in. This eventually leads to disaster. Here in the U.S, we are having trouble trying to get our imbecile politicans to understand this. Take your own like for instance. If you spend too much on your credit cards and take out numerous loans, you eventually will be ruined because the debt adds up fast and the interest alone is crushing. You want banks to say "ahh dont worry about it lets forget that $100 billion you owe us?" China is not writing out blank checks to bail everyone out. Grow up, take some personal responsibility and get your house in order. Everyone living off the government is unsustainable

    November 3, 2011 at 6:09 pm |
  11. Mark

    Vinny: I couldn't agree more. Also I believe that's clear (by now) that the politicians are NOT to be trusted when it comes about "the economy" or when they manage lots of public money . It's not just the "if you vote for me I'll give you a job , public job of course" . They can and must deal with minor everyday things, like the local traffic .. what else? planting more trees and stuff like that. Every time we trust them for money they are ca[able to produce disasters (madoff didn't do it all by himself, who was paid to control got paid but did NOT control). The Europeans are funny: they hate eachother and act like they want the same things, even the money is funny: there is no "one bank" but many banks all going in different directions. But the main thing is that their politicians hire people not to work but to get their vote for life. Now we want THEM to change things? really?

    November 3, 2011 at 6:38 pm |
  12. Tino

    It never ceases to amaze me how much like Mussolini are Berlusconi's mannerisms. He stands with a self-assured look on his face, with arms folded across his chest very sure that is is not only always correct about everything but that everyone agrees with him. He also often makes the fascist sign with his hand and arm and on his "days off" is usually completely attired in black shirt. I find it most interesting that it's not ever been noticed or at least not mentioned by the media anywhere–or at least I've not ever read nor seen it in the media anywhere!! he most assuredly brings a foul air to the whole of the already foul-aired Italian political system that unfortunately emanates throughout the whole of Italy. How the man has lasted so long in office speaks to the electorate as much as how W got a second term in the US speaks to our own electorate. These are bad times.

    November 3, 2011 at 7:05 pm |
  13. Jon-Michael Britain

    I KNEW this "EURO" was a bad idea back in the '90s when all of this was 'in theory'... Now it just the chickens coming home to roost....

    November 3, 2011 at 10:56 pm |
  14. Mark

    well , Italians have free college education and free healthcare : so they must be rich, because I don't have any of that. And I live in the U.S. of A. basically it all comes down to this: they are spoiled morons (along with all the others european spoiled morons) and the rest of the world shouldn't be concerned if they can't afford fancy clothes and new cars every year. Let them go back to work like everybody else.

    November 5, 2011 at 1:09 pm |
  15. Jean-Francois Morf

    Latins and Greeks think false: they think they can inflate every month all prices, all salaries, and the % of civil servants!
    As they where accustomed at Lira and Drachma times! But creditors having lent more then 60% of BIP to Italy and Greece knew they committed a crime against Maastricht treaty! There are so many stupid european peoples having learned Latin-Greek at school, and the false way of thinking of the old Latin-Greeks, instead of learning sciences, and the right way of thinking of the scientists! Now all these stupid Latin-Greek learners must learn to think scientifically right, because they will now loose everything they falsely got!

    November 6, 2011 at 10:28 am |
  16. Petros

    surely, these Europeans have understood the effect of 'bailout' upon the commoners and peasants? Robin Hood in REVERSE!

    November 6, 2011 at 1:16 pm |
  17. Nick Santoro

    Italy is a most beautiful country but now that they accepted chinese into their country beware they are mean and lean they do not belong in Italy different culture they will undermine your country . they work for rice. the greedy corp run to them so that they can make another extra billion dollars as if the one persent needs it. BUT BUT the time is here the wall streeters have started a world wide revoulution where the rich will finnaly pay their taxes like we do.

    November 6, 2011 at 3:48 pm |
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    September 21, 2012 at 11:48 pm |
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    September 22, 2012 at 7:47 am |

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