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.