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
    +5

    Comment number 24.

    The Austerity measures we have in place are as nothing compared to our commitment to all these bailout funds.

    France next then its our turn methinks happy new year.

  • rate this
    -6

    Comment number 23.

    When you are immersed in a blog such as this, it's easy to convince yourself that the Euro cannot possibly survive. Logic, broad agreement, and the facts are pretty convincing.

    But don't dismiss the unexpected.

    Maybe the Fed will come to the rescue of the Euro. The US has much to lose - now and in the future - if it bites the dust. And of course, there is a lot of private wealth at stake.

  • rate this
    +2

    Comment number 22.

    So its the banks fault for lending to reckless sovereign govts, these loans are then the best asset the bank can hold as per the rules set by - um - politicians of aforesaid sovereign govts ? Now it seems the politicians dont have a solution to a problem of their own making in more ways than one.

  • rate this
    -2

    Comment number 21.

    5 - shurely shome mishtake. I meant inkjetz Scotty.

  • rate this
    0

    Comment number 20.

    Italy has, in many ways, same problems as UK although FI is a much smaller part of its economy, in comparison.
    For Italy, to emerge from crisis - it needs to recognise that its economy is over taxed like UK & most people going to be cash squeezed - needs to keep domestic agg demand high & CUT VAT to ZERO to achieve this as is a powerful lever that no EU member seems to be pulling - surprisingly

  • rate this
    +1

    Comment number 19.

    The EZ has to print and it either does it collectively or individually, up to them. Its quite pathetic that G8 countries can get themselves into this sort of mess and just dither around. If a group of G8 countries can't save themselves who can. It is clear that the move to printing will only occur with a push so that is exactly what is happening. Bonfire of the vanities

  • rate this
    0

    Comment number 18.

    Well here we all again, first Ireland, Greece, Portugal then Spain and now Italy! Surely even the most die hard EU supporter has to admit that, to quote Elvis 'ITS OVER'
    The Euro dream of political domination by the EU is finished, done, dead, deceased, demised. Dump it, lick your wounds and return to your natural currency's before EU selected technocrats run every Euro land in Europe!

  • rate this
    0

    Comment number 17.

    'What ever will be will be
    The futures not ours to see"
    But it's very very dark out there!

  • rate this
    -1

    Comment number 16.

    4.BABELrevisited
    13 Minutes ago
    Dylithium crystals all gone Scotty?



    Thank God all them Iranian ayatollahs are enriching uranium as mad.

  • rate this
    +15

    Comment number 15.

    Coalition, Conservatives, Lib-Dems - no difference. It's the banks, stupid. It's the nefarious financial products, the derivatives, CDOs, Swaps = all that odious debt that needs wirting off. Yes, we will all suffer - from the screaming of the banks alone, never mind the choas and the austerity.

  • rate this
    +7

    Comment number 14.

    "Investors are now starting to question....."- says it all really
    Where have they been living?

  • rate this
    +7

    Comment number 13.

    `...a highly indebted government that's presiding over a very slow-growing economy.'

    As with us, so with Italy.

    I am minded to the tale of John Bunyan, who seeing a man being taken to his execution, remarked `there but for the Grace of God goes John Bunyan'.

    This is a moral tale on which we should all gainfully reflect.

  • rate this
    -4

    Comment number 12.

    The word capitalism is now quite commonly used to describe the social system in which we now live. It is also often assumed that it has existed, if not forever, ...
    Looks like it is finally broken

    Must dust of my copy of :-
    com·mu·nism/ˈkämyəˌnizəm/Noun: A political theory derived from Karl Marx, advocating class war and leading to a society in which all property is publicly owned and

  • rate this
    0

    Comment number 11.

    IMO, Italy must to gamble if it is do do any other than accept the inevitable.
    Italy could cut its VAT rate (or better still eliminate VAT) in an affort to stimulate demand & test reaction on money markets?
    Well managed VAT cuts can be self funding & can provide significant stimulus to consumer behaviour, bank lending & small business margins etc - very few see the potential here as over-taxed

  • rate this
    +3

    Comment number 10.

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

    And what after that?

    Considering that neither China, nor Russia indends to throw good money after bad, and IMF has stated the same expressis verbis?

  • rate this
    0

    Comment number 9.

    The shape shifters are usurping control from the klingons. Can only hope that Angela's wont risk using her vulcan powers to mind meld with the traitors.

  • rate this
    +14

    Comment number 8.

    I see NO REASON European Financial Stability Facility should turn itself into big bazooka. It's the investment banks too big to fail that caused this mess by sucking up every surplus cent to sop up its own toxicity with bailouts. The EFSF should stop trying to float any country. It's time to call these investment banks to account.

  • Comment number 7.

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

  • rate this
    +8

    Comment number 6.

    This is surely the end game for the euro. Its going to get much,much worse before it gets any better. Apparently, and this comes from a good city source that i know, Germany has been quietly printing Deutsche Marks since April this year. What does that tell you about Germanys long term approach to the Euro?

  • rate this
    0

    Comment number 5.

    So which is it gonna be, fiscal union, Eurobonds, Euro collapso or the Goldilocks option i.e. fire up the injets Scotty?

 

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