March 8, 2021

Markets Assault Spain and Italy Debt

The grand European plan that came together barely two weeks ago, aimed at once again bailing out Greece and preventing its ills from spreading to bigger European economies, no longer seems so reassuring. Suddenly, the wolves are back at Europe’s door.

On Tuesday, traders renewed their attacks on Italy and Spain, the third- and fourth-largest economies in the 17-nation euro zone, pushing their borrowing costs, at least for now, to the tipping point that led Greece, Ireland and Portugal to apply for bailouts. Some people now fear that Italy and Spain could run out of cash to meet their debt obligations in a matter of months if, like the others, they are shut out of international markets.

“The problem is we have not stopped the contagion that is putting pressure on Italy and Spain,” said a senior European finance official involved in the rescue programs, who was not authorized to speak publicly. “We would be confronted with enormous problems if things got worse.”

The latest Marshall Plan for Europe was supposed to keep those nations safe from the spreading fire and, by extension, cushion the many European and American banks that hold their debt. While the economies of Greece, Ireland and Portugal are relatively small, European leaders would face challenges of a different magnitude if Italy and Spain were engulfed by the same forces.

With many Europeans off for their summer holidays, thin trading conditions may be exaggerating the market’s movements. Still, the sense of urgency was palpable in Rome, where Giulio Tremonti, Italy’s finance minister, held an emergency meeting of the country’s financial authorities as interest rates on Italy’s benchmark 10-year bond touched a 14-year high of 6.21 percent Tuesday. Without stronger economic growth, higher rates could make it too costly to service Italy’s heaving debt, which, at 119 percent of gross domestic, is one of the world’s largest.

A leadership vacuum at the highest levels of the Italian government has further unnerved investors. Prime Minister Silvio Berlusconi has been silent on the debt crisis for nearly a month as he battles a sex scandal and grapples with court cases. He was scheduled to address the matter Wednesday in a speech on the economy before Parliament.

In Madrid, Prime Minister José Luis Rodríguez Zapatero was taking no chances either. After agreeing last week to step down early to take responsibility for Spain’s economic crisis, he delayed the start of his vacation Tuesday to cope with Spain’s problems.

The yield for the Spanish 10-year bond rose to 6.45 percent, the highest level since Spain joined the euro club, before retreating a bit. The surge is ill timed because the government needs to raise as much as €3.5 billion, or nearly $5 billion, in a bond auction Thursday.

The governments of Germany and France, the euro zone’s largest economies, can hardly afford a bigger cleanup bill for Europe’s debt crisis. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France hinted as much last month, telling Mr. Berlusconi in separate brief conversations that they felt sure he would do the right thing for the economy, according to a person with knowledge of the discussions.

Both Italy and Spain still need to tackle a mountain of debt and show they are making real progress toward straightening out their finances. Until that happens, investors are likely to keep driving their borrowing costs higher.

Markets are also unnerved by the prospect that creditors would share additional pain should other countries go the way of Greece. With German and French politicians pressured to show that taxpayers won’t be the only ones footing bailout costs, banks in those countries agreed to take some losses in the most recent bailout of Greece.

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