Italy the latest country to face crisis in euro zone

Recent months have not been good for the euro zone.

First, the Greek sovereign debt crisis threatened to bring down the euro zone and necessitated two massive bailouts. Then, elections in Greece and France brought more pessimism and uncertainty to markets, and Spain realized its banks would need a $125 million bailout. Now Italy is being rocked by a debt contagion that is spreading across the continent.

Italian Prime Minister Mario Monti received a rude awakening on Wednesday, when Italy’s borrowing rates skyrocketed in a bond auction to near-record levels. Despite high demand, Italy paid an interest rate of 3.972 percent, up from 2.34 percent in a similar auction last month, meaning investors are worried Italy could be next in line for help from the European Union.

“Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain’s request for external assistance,” sovereign debt expert Nicholas Spiro said.

Italy has a lower budget deficit than Spain, but its economy is not growing, and its overall debt — nearly 120 percent of GDP — is massive.

“We should use these new difficulties to double our efforts both on the European front and within Italian politics,” Monti said in a speech to parliament.

Monti’s government passed an austerity package of sorts in December, which was a combination of tax hikes and spending cuts. Political infighting over reforms and the unpopularity of new taxes has caused Monti’s popularity to plunge from 70 percent in November to 40 percent last week, according to CBS News.

“We need to have fiscal discipline and growth policies for fiscal policies to be sustainable in the long term,” Monti said in Berlin.

However, Italian bond yields have been rising this week, with the 10-year bond yield at 6.16 percent. Political infighting has stalled many of the labor reforms pushed by Monti to increase competitiveness.

Germany continues to back Italy’s austerity measures and has urged the country to stay on course in order to avert a bailout that might exacerbate the crisis.

“If Italy continues along Monti’s path, there will be no risks,” German Finance Minister Wolfgang Schaeuble said in an interview with La Stampa daily.

Despite this support, the situation is still dire and could become worse if Italy does need to be bailed out.

“As things stand right now, the eurocrats might be able to scratch together enough coin for a full-on Spanish bailout. Italy is another matter altogether,” according to the Wall Street Journal’s Paul Vigna. “For one thing, Italy can’t fund an Italian bailout. So who’s gonna pay for it?”

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