Italy’s financial condition hit red-alert levels Wednesday, touching off some of the same dynamics that caused Greece, Ireland and Portugal to seek international bailouts in recent months and driving down global stock markets alarmed about the possible fallout.
The interest rate that Italy must pay to borrow money — a measure of the country’s viability — spiked to more than 7 percent for longer-term bonds. This jump seemed to confirm the worst fears of European officials: that after months of trying to contain the euro region’s debt crisis to a handful of smaller economies, the financial contagion had spread to a major country whose $2.6 trillion in outstanding debt would make it extremely difficult to bail out.
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The Dow Jones industrial fell more than 3 percent Wednesday on fears that Italy's debt problems may be uncontrollable. (Nov. 9)
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Italy’s bond quandary in 2012
The prospect that the euro zone — the world’s second-largest economic area when the 17 member nations are taken together — could be stretched to the breaking point pushed down major U.S. measures. The Dow Jones industrial average lost 389.24 points, or 3.2 percent, and the broader Standard & Poor’s 500-stock index fell 46.82 points, or 3.7 percent.
World markets rallied late last month after European leaders agreed on an emergency plan to increase the firepower of their bailout fund, shore up the continent’s ailing banks and muster new help for cash-strapped Greece. But since then, developments in Greece, Italy and elsewhere have buffeted those plans and markets have swung wildly.
In Rome, political leaders scrambled Wednesday to accelerate economic changes and budget-cutting plans they hope will ease the pressure building in world bond markets and convince investors that the heavily indebted country can be kept on track. An International Monetary Fund monitoring team is scheduled to arrive this week to oversee Italy’s progress.
The effort involves more than policy changes. Approval of the austerity measures by the Italian Parliament is to be followed by the departure of Prime Minister Silvio Berlusconi, who has lost the confidence of other European leaders, the European Central Bank and world investors.
Berlusconi’s ouster and possible replacement by Mario Monti, a former member of the European Commission, may cure the “political risk” that has turned investors against Italy. But analysts doubt that the change would be enough on its own to stabilize the country — at a time when Europe seems headed for a new recession that would make it even harder for governments to control public debt levels.
Slowing European growth has already begun to hurt the earnings of U.S., Asian and other companies that do business on the continent. On Wednesday, General Motors reported that its third-quarter net income fell 15 percent, dragged down in large part by the economic troubles in Europe.
A financial meltdown in Italy would create problems of even greater magnitude, undercutting global growth and probably pulling down French and potentially German banks that have invested hundreds of billions of dollars in Italy. U.S. banks held about $12.8 billion in Italian bonds as of the end of June and had another $19 billion invested in Italian banks.
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