Italy debt crisis fears hit euro and share prices

Italy is in the firing line because of worries about the sustainability of a debt burden equal to 120 per cent of the country’s GDP.

At one stage this morning yields on Italian 10-year bonds shot past 6 per cent for the first time since 1997. They subsequently fell to 5.7 per cent – still a level which, according to bankers, will put heavy pressure on finances.

Concerns about Italy’s ability to finance these levels of debt have been exacerbated by political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti.

Mr Tremonti left a meeting of eurozone finance ministers early on Tuesday to oversee approval of his country’s austerity measures.

Concerns about Italy’s ability to finance these levels of debt have been exacerbated by political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti.

Mr Tremonti left a meeting of eurozone finance ministers early on Tuesday to oversee approval of his country’s austerity measures.

The package aims to bring the country’s budget into balance by 2014, and includes measures to cut funding to local government and health services, and to delay retirement.

The positive market reaction to news that Mr Tremonti was returning from Brussels underlined Premier Berlusconi’s marginal position in the present crisis.

On Friday Mr Berlusconi criticised Mr Tremonti in a newspaper interview for not being a “team player”, sending already jittery markets plunging. Mr Tremonti is seen in financial circles as a guarantor of budget stability, having overseen tough spending controls.

An all-encompassing financial storm
Rome, is, of course, where the treaty establishing Europe’s economic and political integration was signed. 54 years on, and Rome is at the centre of an all-encompassing financial storm that could send the single currency into reverse, writes Channel 4 News Economics Editor Faisal Islam.

Because this is the real thing. Greece, Portugal, Ireland, as awful as the sovereign crises have turned out for their populations, were just shadow boxing for this. Now the real crisis has begun – the start of a credible loss of market confidence in the ability of a major member of the single currency to repay its debt. The debts of the PIG nations were just 8 per cent of that of the eurozone. If push came to shove, Germany or France could just have bought the lot.

Italy and Spain, however, may well be too big too fail, but Italy is almost definitely too big to save. Italy’s gross government debt, at 1.7tr euros, is an astonishing 23.5 per cent of the existing eurozone debt.

So the pressure is on to settle these fiscal problems within Italy. But Italy’s politics is straining under this pressure. And it’s not just that. Its economy is sclerotic and unreformed.

Amid concerns about the extent of the UK’s involvement in any future bailout of eurozone economies, 32 Conservative MPs voted with Labour in this Commons on Tuesday against an increase in Britain’s contribution to the IMF.

Eurosceptic Tory MP John Redwood called on the British Government in his blog to halt the “futile” bailouts, continuing: “The IMF should decline to bail out rich countries that have shackled themselves to a currency scheme that was badly put together and needs a thorough rethink.”