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The Italian Time Bomb

Over the past three years of crisis in Europe, a regular pattern has emerged. European leaders argue for months as the situation in a troubled country steadily worsens, but finally cobble together a halfhearted deal at the last possible minute. Investors breathe a sigh of relief, bond yields go down, and things begin to stabilize. But the deal eventually proves ineffectual, and the problem spreads to another country. Then the cycle repeats, and as it does so, the grace period following the unveiling of each new rescue package grows shorter and shorter.

Remember last weekend, when those brilliant European policymakers secured a $125 billion bailout of Spanish banks? The grace period after that deal is already over, and now Europe may be in even more trouble than it was before that bailout. The Wall Street Journal reports that Italian bond yields have risen dramatically over the past month—increasing the cost of borrowing money for the Italian government:

The Treasury sold the BTP 2015 at a yield of 5.3%, up from 3.91% at its previous auction on May 14. The BTP February 2019 BTP was sold at a yield of 6.1%, up from 5.21% at its previous sale on April 27, while the Treasury paid an interest rate of 6.13% on the BTP March 2020, up from 5.33% on May 14.

This is particularly bad timing. Italy faces massive economic contraction and public debt that has risen by more than 3 billion euros in the past four months. But it’s even worse timing for Europe, which will now likely have to bail out Italy in addition to Spain. Italy had previously been a large country on the periphery of the crisis. Now it is at the core.

This is the bomb that could blow Europe sky high.

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  • Jim.

    See, this is why deficit spending is a bad idea in the first place, and why we have to find an alternative strategy for economic recovery that doesn’t involve deficit spending.

    It can’t go on forever. This is how it stops.

  • Anthony

    Related material: “After Spain, the focus of the euro crisis has now shifted to Italy, which is struggling with a shrinking economy and rising bond yields.” (Italy struggles to Break out of Downward Spiral – Hans Jurgen-Schlamp, Der Spiegel)

  • George

    Keep in mind that they still have not really bailed out Spain. The $125 billion went to the banks and depending upon how it all works out, will likely result in even larger debt for the sovereign…Spain is far from being bailed out so this is not particularly good timing for Italy.

  • Eurydice

    Italy is so 12 minutes ago. The credit default swap guys are already setting their sights on Germany. Germany is only a safe haven as long as the Euro can be salvaged and, considering where yields are right now, there’s not a lot of “one way” left. If you don’t want to bet on the Euro, you don’t want to bet on Germany.

  • Kevin

    Who was willing to loan Italy money at less than 4% in May?

  • Cunctator

    What a silly bunch of people, those EU leaders and their supporters. The situation would be farcical if so many people were not going to suffer a great deal of distress.

    It reminds me of that famous newsreel of a suspension bridge (in Tacoma) beginning to sway more and more in the wind until it just comes apart and collapses (see

  • Jacksonian Libertarian

    The sooner the better, the longer this drags out the worse the final results are going to be.

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