Last Friday, the credit spread on Italian 5-year debt instruments widened 30 basis points, up a total of 70 basis points for the week, setting a new record. The yield on the Italian 10-year bond rose to 5.28%, its highest level since 2002. At the same time, Italian bank stocks were plummeting.
Now Europe’s top officials are worried that Greece’s debt troubles have already irremediably contaminated other at-risk countries, of which Italy certainly has the largest economy and the more important role in the Euro-Zone, meaning the effects of its debt crisis on the European economy would be far greater than those of Greece, with the potential to do significantly more damage.
Still, Italy (NYSE:EWI) isn’t yet in as dire straits as Greece, nor is it as close to the edge as Portugal and Ireland. Italy’s maturity profile contains no cause for concern, despite the country’s high debt stock, its investor base is less volatile than that of other endangered economies, and adjustment fatigue is a non-issue. Italy’s larger economy allows it greater internal flexibility and scope for corrective policy actions.
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But even the fact that Italy is in its current position speaks to the far-reaching nature of Greece’s debt crisis, and does not bode well for smaller, weaker economies like that of Portugal, which has already received one aid package and, like Greece, may soon be in need of a second. European officials have been slow and indecisive in regards to handling Greece’s debt crisis, and now they will have to be swift in preventing its contagion from spreading. If Italy is already feeling the effects of Greece’s debt problems, it does not bode well for other large European nations with high debt-to-budget ratios, not to mention other, more vulnerable economies.