Italy is Entering Bailout Area

Prime Minister, Silvio Berlusconi

The cost of borrowing in Italy on Wednesday reached a level that could mark a turning point in the European crisis, after the announcement of resignation of Prime Minister Silvio Berlusconi.

The yield on the 10-year Italian bonds was over 7 percent, a level that is considered unsustainable, reflecting investors’ fear of not recovering their money.

This fear was palpable also in a rising cost of insurance against a moratorium.

The Italian bonus risk is around the 574 basis points, thus overcoming the barrier that sparked in Greece, Ireland and Portugal a ransom demand to the European Union and the International Monetary Fund.

The European Central Bank, the only institution in the region with enough firepower to stop attacks on markets, immediately bought Italian bonds to stem the rise in yields, traders said.

“The ECB is buying decent amounts,” said an investor in a hedge fund based in London. “It makes you wonder how much firepower you have. It’s scary. The market was a bit naive when Berlusconi announced his resignation. Now, he realizes there is a mountain to climb,” he said.

Italy has replaced Greece as the center of the debt crisis in the euro area and travels on a thin line that could lead the country to ransom that Europe would not be able to offer. (LO)