Yields on Italian government bonds reached frightening heights on Nov. 9, the day after Silvio Berlusconi, Italy’s longest-serving Prime Minister, offered to resign as soon as Parliament passes an austerity package. The market’s refusal to be appeased by Berlusconi’s promised departure indicates that even more dramatic measures may be required to prevent a death spiral for Italy’s $2.6 trillion in sovereign debt. “Bond spreads don’t allow us to wait, not even one hour,” Dario Franceschini, leader of the opposition Democratic Party, wrote in a posting on his website.
The increasingly dire situation in Italy—whose sovereign debt is the fourth-largest in the world—sent shock waves across the euro zone and beyond. “Tragically in Italy … the price of borrowing money is getting to a totally unsustainable level,” British Prime Minister David Cameron told lawmakers in London on Nov. 9.
Italy faces long-term slow growth as well as short-term investor panic in the bond market. Although both must be solved, the country’s deteriorating government finances are clearly the more immediate threat. The yield on 10-year bonds jumped on Nov. 9 to 7.2 percent, above the threshold of 7 percent that led Ireland, Portugal, and Greece to seek bailouts. Worse, yields on short-term securities passed 7 percent, too, a sign of fear that Italy will default.
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