European Financial Crisis Worsens; Italy Next?

By:  Bruce Walker
08/05/2011
       
European Financial Crisis Worsens; Italy Next?

As U.S. politicians scramble to defend themselves against raising the federal government’s astronomical debt to an even higher level, Americans may be seeing the reflection of their own future in the grim picture of insolvency across Europe.

The so-called PIGS nations of the European Union (Portugal, Ireland, Greece, and Spain) are all caught in a vise: on one side, spiraling debt and obligations which can be serviced only through borrowing, and on the other, the increasing costs of borrowing resulting from profound doubt in the minds of potential buyers of government debt instruments that bonds can be repaid.

As U.S. politicians scramble to defend themselves against raising the federal government’s astronomical debt to an even higher level, Americans may be seeing the reflection of their own future in the grim picture of insolvency across Europe.

The so-called PIGS nations of the European Union (Portugal, Ireland, Greece, and Spain) are all caught in a vise: on one side, spiraling debt and obligations which can be serviced only through borrowing, and on the other, the increasing costs of borrowing resulting from profound doubt in the minds of potential buyers of government debt instruments that bonds can be repaid.

The PIGS have now become the PIIGS with the addition new member Italy, as on August 3 the yields of 10-year Italian government bonds hit a new high. (There is an inverse relationship between a bond's price and its yield.) The government sold €3.9 billion of bonds at a yield of 5.77 percent, significantly higher than the 4.94-percent yield in bonds sold as recently as June 28. The Bank of Italy's Deputy Director-General Ignazio Visco told the Italian parliament that each rise of 100 basis points in the cost of borrowing would be equal to a reduction in Italy's GDP by .2 percent in the first year and .4 percent and .5 percent in the second and third years.

According to Spiegel online,

Click here to read the entire article.

Photo: The European Central Bank

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