November 9th, 2011
12:38 PM GMT
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London (CNN) - Italy’s bond yields passed 7% Wednesday morning, breaching a psychological point at which markets consider countries at risk of being unable to fund themselves.

The dramatic rise in 10-year bond yields comes the day after Italy’s flamboyant Prime Minister Silvio Berlusconi said he would resign after the country’s budget is passed. The 75-year old Berlusconi has been a dominant force since forming the Forza Italia party in 1994, and his pending departure marks the end of an era for Italian politics.

But while the political spectacle that came with Berlusconi could now fade, the financial show might be just beginning. The pricing – set by traders who are selling Italy’s bonds – hit 7.3% by mid morning after breaking through 7% a short while earlier. “It’s like tectonic plates,” a desk analyst told CNN. “You have this pressure and then it breaks.”

To put Italy’s bond yields in context: Ireland bond yields were just over 8% before the country was bailed, Greek yields touched 10% and Portugal's hit 9%.

Italy and Spain – the eurozone’s third and fourth largest economies – are those often referred to as too big to fail. So far, the eurozone countries and the European Central Bank have actively kept the bloc’s struggling economies afloat.

But their powers may be limited when it comes to Italy. The numbers are huge, and the political - and financial - capacity to continue supporting the bloc’s weak will face a mighty test should Italy stumble.

The numbers are brutal. Italy’s economy makes up 17% of the eurozone. Combined, Greece, Ireland and Portugal – the countries currently living off Europe’s bailout fund and the International Monetary Fund – make up less than 6%.

Italy’s debt stands at €1.9 trillion ($2.6 trillion), or 120% of gross domestic product. Compare that to the combined Greece, Ireland and Portugal’s debt – around €640 billion as at full year 2010, according to Eurostat, the statistical office of the European Union.

Italy faces around €380 billion in bond repayments and deficit costs by the end of 2012, according to Evolution Securities' analyst Elisabeth Afseth. Its next major payment is €26 billion, due in February next year. With its funding costs now over 7%, that could prove an huge hurdle.

The oft-quoted 7% figure is, by and large, arbitrary. It is regarded as the level at which countries can no longer fund themselves - but depends on how long it stays at that level and how much the country needs to raise.

Vitally, however, it is a measurement of confidence and that – in these volatile markets – matters. When yields hit 7% it is extremely difficult to pull them back. According to Afseth, it is seen by investors as a "point of no return.”

And Italy’s situation is probably worse than the bond yields suggest, with the ECB’s intervention keeping the price of its funding down. According to Evolution Securities, the ECB began buying Italian and Spanish bonds on August 8 this year, after yields hit 6.08%. The following week, the ECB settled €22 billion of purchases. Last week, the bank settled €9.52 billion in purchases – the bulk of which were most likely Italian bonds, according to Afseth.

While the ECB – whose presidency has just been taken up by Italy’s Mario Draghi - has proved a key player in the survival of the eurozone to date, its patience appears to be growing thin. This week Yves Mersch, the governor of Luxembourg’s central bank and a member of the ECB's governing council, told Italy’s La Stampa the bond buys should be “limited in quantity and in time.”

He said if the bank’s interventions are being undermined by a lack of effort from national governments, “we should ask ourselves about the problem of incentives."

If Italy is forced to turn to Europe’s bailout fund, the outcome looks ugly. The fund is being enlarged to a lending capacity of €440 billion. Of that, around €140 billion has been committed to the bailouts of Greece, Ireland and Portugal, according to Afseth.
That leaves €300 billion – a sum that Italy would suck up, before needing more.

Plans to leverage the bailout fund, part of the triple-pronged attack on the crisis revealed after European leaders’ crisis meeting in October, will also suffer from the market’s plummeting confidence.

And so the markets watch and wait, as Italy’s “too big to fail” economy teeters on its financial tightrope.

soundoff (45 Responses)
  1. Bob

    Never too big to fail. How will anyone ever learn from their mistakes if they keep getting bailed out?

    November 9, 2011 at 5:19 pm |
  2. rene

    bad news sells better than good news.
    dont believe this news sensationalism, the global market is not dependent on Italy or Greece
    hold on to your stocks, don't sell and if you have spare cash buy more blue chips while the prices are cheap now.
    1923, 1980, 1990, 1997 these were the previous years that the financial whorl was coming to an end but it turned out fine afterwards

    November 9, 2011 at 5:22 pm |
  3. Joe

    This just proves that G7 (or 8 or whatever) are just a bunch of primadonnas thinking they're better than everyone else while living off of loans to support their expensive lifestyle.

    November 9, 2011 at 5:33 pm |
  4. Deepsealine

    Hypothesis by so called Financial experts, these åshøles are nothing but bunch of thugs, want to know Why Economic Models Are Always Wrong? read this

    November 9, 2011 at 5:40 pm |
  5. Offf

    Agreed with Bob

    November 9, 2011 at 5:47 pm |
  6. WSBen

    Agreed with Bob as well.....if you keep getting bailed out all that will happen is you will keep coming back for more.

    November 9, 2011 at 6:00 pm |
  7. WSBen

    Greece, Ireland and Poland get bailed out as well as Italy.......who is going to bail us out??????

    November 9, 2011 at 6:04 pm |
  8. Nuno

    Monstruous injustices are going to be comited !
    Those who are honest, prudent and savers will be the ones that suffer the most !
    Profits are PRIVATE but debt is PUBLIC

    November 9, 2011 at 6:05 pm |
  9. Tiff

    i am so sick of hearing "TO BIG TO FAIL".... Its a myth that the Banksters want us all to believe.. that if we don't give them tons of money to dig them out of the bad choices they made (and are continuing to make) that we will all somehow suffer for it..
    While it would be hard for a short time after these giants fall, we will all be better off in the long run if they do... To me, its like when you have a toddler... if you reward bad behavior, it will continue... if we give more money to those who have proven to mis-manage money what do we think will happen? The last 4 years has shown us that a bail out doesn;t mean saved jobs or anything good for those footing the bill... its just more $$ in the pockets of those who don;t need anymore.

    November 9, 2011 at 6:38 pm |
  10. 7plus7

    The problem of people from southern Europe – want to sleep, to celebrate and receive money from the North. This impact is similar to that of the Civil War, but economic. North does not want to pay for lazy money because money like sleeping. This is nonsense.

    Here in Bulgaria. Most small and poor country in the EU. There, now you do what Russia wants. See section Exclusive.

    November 9, 2011 at 6:55 pm |
  11. 7plus7

    At this new site shows student who commanded Europe. Russian corporations and politicians. Only 7plus7. net

    November 9, 2011 at 6:56 pm |
  12. Rikkert

    Nothing is too big to fail unless one defies the laws of free market capitalism and those of nature.But Italy is too big to bail out.So if Italy fails there is nothing anyone can do about it.

    November 9, 2011 at 7:07 pm |
  13. Konstantinos

    The idea of common currency in different countries with different bond rates failed. Helped the Germany's economy to grow but now leads millions of people to poverty and humiliation. The solution is a political unity. Same taxes, same rates, same finance control.

    November 9, 2011 at 7:25 pm |
  14. suzy diamond

    WHEN are we going to get it through our HEADS!!!!!! NO ONE and NO COUNTRY INCLUDING THE US is TOO BIG TO FAIL!!!!
    The sooner we "get" this the sooner we'll get BACK on track!!!

    November 9, 2011 at 7:28 pm |
  15. Steve Thompson

    The problem facing the world's bond markets is just beginning. As shown in this article, even the United States is about to join the exclusive group of nations with a debt-to-GDP ratio that exceeds 100 percent:

    The world is awash in government debt and both Italy and Greece are but the tip of the iceberg. Until those that we elect stop spending more than they tax, the situation will not improve.

    November 9, 2011 at 8:07 pm |
  16. Rikkert

    @Konstantinos that would just mean countries like Germany would be jn the same trouble as Greece Spain,Italy et al are in now.Because these countries lack the sort of spending discipline and culture that makes the electorates realize they cannot vote for politicians that just promise them the universe and no pain. Someone has to pay for it all.Germany and others have over the years introduced painful reforms both to their labor markets as well as in their government spending.Greece Italy and others never went along with this but instead just borrowed what they couldn't earn themselves under threat of the electorate that would vote them out of office if their benefits or cushy government jobs were cut.Now you have the mess you are in.Don't say no one warned you.

    November 9, 2011 at 8:37 pm |
  17. Gif

    The only way to stop the Banksters is to shut down the stock markets. Globally. And no, this will not mean the end of cash flow for the businesses...

    November 9, 2011 at 8:51 pm |
  18. Edward

    Italy does not fail because someone has decided he wants to gain from this! Italy is not only "Pizza – Pastasciutta – Mafia – Justice corrupt – Clowns" Italy is made up of many good people who left to silent but now you are going to rebel .. However I think the fuss about finance serves only to distract us from something very bad that could happen soon .. and I am not referring to the Mayan prophecy of December 21, 2012, but some nuclear war that would be a real problem!

    November 9, 2011 at 10:07 pm |
  19. sakari

    Yes, Italy is too big to fail, so we must it let collapse.

    November 9, 2011 at 10:21 pm |
  20. Eddie23

    Countries find themselves in debt crisis is because they followed the American model of issuing bonds to a level where it finds itself not being able to pay back. Going out of the strict discipline wherein bonds should be backed by gold is the start of a country's economic downfall. As a result, current politicians are finger pointing as to who is at fault without achieving any solution to address the crisis they're in.

    November 9, 2011 at 10:30 pm |
  21. wakeup

    Say I owe you the monthly rent and due to the crisis i was made redundant. Consider that I may not be the best tenant in the world, but i pay your price and have ALWAYS paid it. Now i do have some spare cash in the account, but since I am no longer in a job and I am a bit of an unreliable guy, you do not TRUST me any more and want your money right away (for the full length of the contract -pretend it was some years duration). You won't get your money back obviously; perhaps only a small percentage of it. On top, you have been repossessed by the bank due to the aforementioned. So your urge would produce the opposite effect to your own desires.....Who would ever pull the plug, sensibly? only those who have nothing at stake, i.e. short sellers on CDS etc. Others with something at stake would stay on, knowing that in the end Italy has always and invariably honored its debts. True, reforms are long overdue but in a 10 to 20 years' perspective whilst you may worry about the tenant's ability to pay, you can't really bank on the idea that things will stay the same way. Short sellers beware......

    November 9, 2011 at 10:39 pm |
  22. realist

    They are screwed

    November 9, 2011 at 10:49 pm |
  23. Beerbarrel

    OK, EU, print more Euros to bail out the whole Eurozone. Depreciate you Euros by 50% will help. Euro-QE1.

    November 9, 2011 at 10:52 pm |
  24. wakeup

    It would also be sensible to stop comparing italy to greece. Greeks did cheat on their numbers, Italy did not. Now it would be nice to understand why there is all this frenzy about italy being unable to pay when the situation was well known, being exactly the same today as it was ten years ago, but -yet – debts got paid off, and nobody lied, it was all plain to see. TOO BIG TO FAIL? do you realize what this means in reality? speculators convincing idiots that they have to lock-in their profits.

    November 9, 2011 at 11:02 pm |
  25. simone from Italy

    Do we are all aware this bag game against Italy is played by the big finance players such us hedge funds, sovereign funds and banks most of them from the same countries most of you are living? People writing such STUPID things I am reading, do they really understand what is a FAIL of such a Nation like Italy? Do you think Italy is all about mafia and spaghetti, common STUPID thinking of STUPID people round the world? Wakeup is right and realistic, the debt from Italy is as big as it was in the past, it has been always over the GDP and it has been paid ALWAYS. It is sad to see the speculators are winning once again the game, cause stupid people are playing their game! Wake UP!

    November 9, 2011 at 11:11 pm |
  26. sherman

    and do what after we are awake?

    November 9, 2011 at 11:38 pm |
  27. ed

    French public debt has grown much more than Italian: from 1996 to 2010 grew from 52% to 82%: The Italian deficit is higher than 7.8% in France, 3.9 in Italy. Even U.S. has a debt of 100% of GDP and a deficit of 10%: the next victim will be U.S.?

    November 10, 2011 at 12:07 am |
  28. ed

    Official German government debt is 82%, but the real one is 110% gdp. They hide the money offered to East Germany, by public companies. They rigged the accounts as the Greeks. Speculators attack the Germans

    November 10, 2011 at 12:15 am |
  29. JT

    Sorry rene, but unfortunately you are wrong.

    Never in the past have debt levels been so high, so much population growth, such an aging population, already high levels of unemployment and contracting economies. This is truly a global correction for at least tens of million of people.

    The main issue is the debt levels are so high, and increasing every year, that the interest payments will start to become unaffordable – something that has not happened to entire countries anywhere in the past on such a scale.

    The US must now embark on 4 trillion dollars of cuts with already high unemployment and a very small growth profile – it is going to be very difficult.

    November 10, 2011 at 12:15 am |
  30. ed

    Italy has a deficit gdp equal to 1 / 3 of the U.S., the world is weird, right?

    November 10, 2011 at 12:24 am |
  31. charles johnson

    I have the solution and it is quite simple. All Eu members should pay the same interest rate collectively. Each member should have a vote if a member should receive the loan / bond.
    The solution to higher interest rates is to stop borrowing. The rest of the expenditures will fall into place and is no different than what each one of us has to do to budget our finances. To me, the solution is quite simple.
    The other thought I have is, we are the customers for the loaners, so who are they to set the interest rate? We should simply tell them what can be afforded and let them make the decision whether to loan or not. After all, what else are they going to do with all that cash?
    I see not reason to go "hat in hand" to these vipers to get money. These negotiations are after all, a two way street

    November 10, 2011 at 1:00 am |
  32. flyer

    A famous italian poet used to said: italy is a very poor country where live a lot of very rich people.
    its fake democratic political system should be crashed by old Russian communism, so that those cheating money from the rich, bankers and politicians will finally be contributed to the people who really need it, such as retired blue-collars, farmers and normal hard-working class, and children and youths for their good quality education.

    November 10, 2011 at 1:11 am |
  33. peter

    The irony is:
    1. The Eurosone as a whole has less debt than the US and very small budget deficit.
    2. The difference between Germany (85% of GDP) and Italy (120% of GDP) is not that big.

    It's not really necessary for Germany to bail out Italy – they just have to ask the ECB to do it.
    The reason the US has no trouble is that FED will always baid the govermnent out with fresh new $ – it has no choice.
    But in Europe if Italy goes into trouble the Germans will say "Hey, how come we get inflation because someone else messed up?" and block the ECB from bailing them out with fresh new EUR.
    But the irony is that what comes next is France going into trouble and Germans repeating the same argument.
    Then Germany goes into trouble and the more prudent Finland and Slovakia quote the same arguement.
    And in the end the EUR becomes worthless... because of not wanting to take the trouble to devalue it in order to save it.

    November 10, 2011 at 2:33 am |
  34. The Fury

    I seriously want to murder everyone at CNN, just for continuing this "too big to fail" bullsh!t.

    November 10, 2011 at 2:51 am |
  35. dfgdfgd


    November 10, 2011 at 3:08 am |
  36. Mary

    Agreed with Bob too

    November 10, 2011 at 3:24 am |
  37. Okie Dokie

    Take note of "psychological point" "consider" "at risk of." We are talking our selves into an Economic Quagmire. Italy has not yet failed – neither for that matter has Greece. The market is roller coasting along all based on speculation and fears, I s it really unfeasable for Large comapnies to trade at a reduced profit for the next two years if it means the "fear" of lack of job security passes – no fear = more spending = stronger local encomy – etc etc etc. Is it too much to ask that shareholders take a reduction in their dividends for the next year or so ??. Why Increase borrowing rates when by incereasing those rates you are ensuring that the debt wont get paid ? . This is a profit based problem but maybe I'm just oversimplifying matters.

    November 10, 2011 at 3:40 am |
  38. martytinoz

    But, but, but, globalization is GOOD, right? If some fail, we ALL, fail TOGETHER (even when some/many of us were NOT STUPID); isn't that "good"?????

    November 10, 2011 at 3:53 am |
  39. Bernard

    In the end, they'll pay us with Ferraris and Lamborghinis. Hmm... not a bad idea.

    November 10, 2011 at 4:05 am |
  40. King Godwin

    the ultimate solution to this crisis can be found at www dot tradeexchangeghana dot net . Ask the #1 international trade exchange consultant at the above site for the solution to this crisis, and you will get it free.

    November 10, 2011 at 6:08 am |
  41. wakeup

    @ sherman

    ...if you can't see it you better keep on sleeping, mate. We keep italy on its toes for a while till they finally approve reforms and then go back to normality.
    end of the story.

    November 10, 2011 at 7:07 am |
  42. Jose Samhan

    Hopefully, AIG is not insuring the debt of Greece and Italy. Otherwise the US bail outs for Europe will start soon.

    November 10, 2011 at 7:02 pm |
  43. EA Marco Polo

    Let next year's revenue to be bigger than spending.

    From prime minister to every government employee to be cut half salary until the crisis is to be ended, then restore the salary.

    Big austerity is the best way for Italy and Greece.

    November 11, 2011 at 1:17 am |
  44. eficiencia energetica

    Puedes explicarnos ms sobre esto?, ha sido fantastico encontrar mas explicaciones sobre este tema. eficiencia energetica

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