Italy's moment of truth

 
Bank of Italy in Rome

Italy has reached a moment of truth.

The 7.89% interest the Italian government had to pay this morning to borrow 3.5bn euros for three years, and the 7.56% interest that investors demanded when lending to Italy for 10 years: well, those rates would be completely unaffordable if applied to all 1.9tn euros of its public-sector debts.

So the make-or-break question - for Italy and for the eurozone - is whether there is the faintest chance those rates will fall, without the supply of emergency finance to a highly indebted government that's presiding over a very slow-growing economy.

The precedent of Greece, Portugal and Ireland suggests there is little prospect of Italy's borrowing costs returning to non-penal levels without outside help, even if its government of technocrats produces a credible programme both to reduce the mountain of debt and put some fuel in the economy.

Here's the nightmare: the source of rescue finance is hard to find.

The eurozone's official bailout fund, the European Financial Stability Facility, has not yet been turned into the promised big bazooka, with enough financial capacity to cover the 400bn euros that Italy will need next year to refinance maturing debt, finance the deficit and pay interest.

Right now, the EFSF has enough in the kitty to keep Italy afloat for a bit more than six months.

As for the International Monetary Fund, China and the US are not keen for it to fill the breach, because they see Italy as a European problem requiring a European solution.

The other potential lender of last resort is the European Central Bank, but it is as reluctant as ever to lend substantially to a eurozone government.

All of which means that tonight's meeting of eurozone finance ministers is of critical importance. But if this were an episode of Star Trek, they might well be in the engine room shouting, "I dinnae have the power, Captain".

PS David Riley, the Head of Sovereign Ratings at Fitch, has just told Stephanie Flanders that "investors are now starting to question the entire viability of the eurosystem".

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 144.

    Italy, like Greece, Ireland, Portugal & Spain, should default on their debts, exit the Euro, stop paying tax (vat receipts) to a criminal organisation (the EU) and immediately take control of its currency into publicly owned state bank, eliminating the current privately owned Central bank. Until this happens we'll all just be paying private bankers more and more interest!

  • rate this
    0

    Comment number 143.

    @142.nautonier


    Purchase tax was 33 1/3 % on lots of stuff.

    Records, for example.

  • rate this
    0

    Comment number 142.

    120.treacle_01

    @112.nautonier
    Anyone remember life before VAT existed, as VAT is just an extra tax for the sake of it?
    ----

    Ahh. The delights and anomalies of Purchase Tax!

    ++
    Yes and PT was only 10% and worked for Brits & economy much better than VAT at 20%.

    Only idiots fail to see that with VAT we all have to earn & borrow more as puts more cash in hands of bankers for bonuses

  • Comment number 141.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    0

    Comment number 140.

    #138 luzaranza
    Naked CDSes are banned in the USA and (I thought) in the EU.

    CDSes in the clothed form are just insurance. I believe banks use them. It was stupid of the eurozone leaders to make the sovereign bond haircut 'voluntary' because they effectively negated the use of CDSes as insurance and made eurozone sovereign bonds more risky than any others.

 

Comments 5 of 144

 

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