Eurozone: Is Italy the next country set for a debt spiral?

28th July 2011

Italy's borrowing costs soared at a closely-watched bond auction on Thursday as investors worried by the eurozone debt crisis and an impasse over the U.S. debt ceiling exacted a high risk premium, adds Reuters.

The Treasury had to pay sharply higher rates to sell off €8bn in bonds including 4.80% on bonds due in 2014 that had last sold for 3.68%, and 5.77 percent on bonds due in 2021 compared with 4.94% before.

Pressure on Italian stocks and bonds reflects both concerns about Rome's ability to bring down its debt pile — second only to Greece's in Europe at 120% of annual output. There are also wider doubts about whether last week's euro zone summit found a durable solution to the Greek debt crisis.

However, Italy is not the only country with potential problems.

As Mindful Money blogger Shaun Richards says on his blog: "Germany and to a lesser extent France were powering ahead in the first part of 2011. However the latest purchasing managers report for the Euro zone as a whole reported this":

Eurozone growth weakest since October 2009…Recoveries slow in France and Germany while Spain and Italy slip back into contraction.

Shaun concludes on his blog: "There has been a media rush to say that the UK's recent economic performance has been much worse than elsewhere but as I have pointed out today many of them have troubles too. We do not yet know the extent of how much their economies have slowed as we await their growth numbers for the second quarter of this year." Read more here.

Investors are concerned that the Italian economy, suffering from high public debt, low growth and growing infighting in the government could follow Greece, Ireland and Portugal into a debt spiral that has thrown the eurozone into crisis, reports the Daily Telegraph.

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