Italian markets hammered as Europe's debt crisis spreads

The cost ofItalian government's long-termdebtsoared to a ten-year highas Europe'sfinancialcrisis spread to the continent'sthird-largest economyTuesday.

The yield on a ten-year Italian bond jumped 41 basis points, bynearly half a percentage point,as investors increased their bets thatItaly will be the nextcountry that willbe forced to restructure its debt.

Ballooning debt

The higher bond ratemeans the Italian government now must pay 5.68 per cent in interest to borrow money for ten years. By contrast, investors are willing to lend theGerman government for the same termat2.67 per cent, or less than half the Italian rate.

Soaring interest chargesare also indicative of the jaundiced eye which the financial market isnow casting at Italy.

Italy has total debt in the range of $2.2 trillion US, approximately 25 per cent of which must be refinanced within the next 18 months. And analysts are concerned that lenders might not be willing to allowItaly more money.

"Even with its bloated debt, Italy has been able to distance itself from other European bailout recipients thus far. But the recent sell-off of nation's sovereign debt...begs the question of whether Italy is the next boot to drop," said Emanuella Enenajor, an economist with CIBC Economics.

Growing pressure

Clearly, international lenders have developed a similar mindset in recent weeks.

The Italian stock market has traded down 23 per cent since the beginning of May andthe costofinsuring Italian debt against a default a relatively common practice hashit an all-time.

These indicators reinforce theview that financial marketsbelieve Italy's fiscal woesmight pressure the governmentto seek assistance from theEuropean Union, analysts noted.

Already the EU and the International Monetary Fund have extended monetary help to Greeceso that country canhandle its massive borrowings while Ireland and Portugal loom as potential candidates for such assistance.

In return,the Greek government recently imposedseverespending cuts on its population in order to get cash tore-finance debt due in July.

Now, Italy and Spain aregetting pushed to installa similarprogram of spending cuts, asset sales and tax hikes in order tostave offa financial default.