Reply #18: Italian bond yields approaching disaster zone [View All]

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http://www.guardian.co.uk/business/2011/jul/11/debt-crisis-europeanbanks

Spanish 10-year bond yields hit 6% today. Italy's climbed at a similar pace, reaching 5.7%, meaning its cost of 10-year borrowing has increased by a full percentage point since 6 June. These are big moves, which is why it's no exaggeration to say the crisis in the heart of the eurozone – as opposed to the drama at the periphery – is under way.

As Gary Jenkins at Evolution Securities pointed out, eurozone sovereign bond yields, once they pass 5.5%, have tended to accelerate upwards to the supposedly critical level of 7%. Two percentage points away from a "potential disaster scenario", he said of Italy – and that was before yesterday's 0.4% percentage point increase eliminated part of the buffer.

There is no simple explanation as to why Italy finds itself the centre of attention. It is not news that the country's debt-to-GDP ratio, at 119%, is the second worst in the eurozone. Rather, the driver seems to be the dithering displayed by eurozone leaders over Greece, specifically over the design of a bailout package. The market can see that, if the authorities can't agree on how to treat holders of Greek bonds, the risk of an uncontrolled default, which would reverberate through the European banking system, is rising.