The 100 billion-euro ($126 billion) rescue for Spain’s banks moved Italy to the frontline of Europe’s debt crisis as an initial rally in the country’s bonds fizzled on concern it may be the next to succumb.
Italy’s 10-year bonds reversed early gains today in the first trading after the Spanish bailout and declined for a fourth day, sending the yield up 7 basis points to 5.84 percent.
To be sure, a total debt more than twice Spain’s gives investors pause, especially in a country where economic growth has lagged the EU average for more than a decade. The euro region’s third-biggest economy, Italy is set to contract 1.7 percent this year, more than the 1.6 percent in Spain, the Organization for Economic Cooperation and Development estimates.
Given the size of Italy’s debt, only the ECB has the firepower to rescue the country and yet deploying that ammunition -- through buying back bonds or making more long-term loans -- may prove unacceptable to Germany and its allies in northern Europe, Mayer said.