The Eurozone debt crisis moved into a new, more serious phase on Tuesday as bond vigilantes drove up yields on Italian and Spanish debt to new dangerous highs, setting in motion crisis responses from Rome to Madrid to Luxembourg.
Bond investors, troubled by increasing signs of a global economic slowdown, sold off Italian and Spanish debt, pushing yields well past 6%, a level generally presumed to be unsustainable. Yields on the Italian 10-year government bond rose to 6.25% and the Spanish 10-year bond to 6.46%, the highest seen since 1997.
Italy’s economic and finance minister. Giulio Tremonti, left for Luxembourg to meet with Eurogroup leader Jean-Claude Juncker about European assistance. Earlier Tuesday, Tremonti invoked an emergency meeting of officials from Italy’s central bank and market regulators, a committee formed three years ago to coordinate responses to financial crisis.
The massive size of Italian and Spanish debt in comparison to that of Greece, Portugal and Ireland imparts global economic significance to Tuesday's bond market news. Italy, for example, has over $2 trillion worth of debt, third only to the United States and Japan. Servicing debt at that size, amounting to 120% of the country’s GDP, at rates higher than 6% may be beyond its ability, leading analysts such as Nomura Securities to describe Italy as “too big to bail.”
Spain’s mounting debt woes, combined with the yield shock on government bonds, prompted Spanish Prime Minister Jose Luis Zapatero to postpone a three-week vacation to deal with the crisis.
His Italian counterpart, Silvio Berlusconi, is scheduled to address the funding crisis in an address to Parliament Wednesday. The government passed a 48 billion euro austerity plan last month, but its sufficiency may be called into question as the country enters this new phase of the crisis.
The Euro zone’s second bailout of Greece two weeks ago has also come under doubt as bond investors push up 2-year bonds, Greece’s de facto benchmark, north of 28%–far higher than they were after the rescue was announced. The yield premium between safe German bunds and Belgian 10-year debt also reached a record high on Tuesday’s markets, widening to a 207 basis point gap.