On Tuesday, the financial community celebrated as Italy’s Prime Minister Silvio Berlusconi tendered his resignation. Today, the euphoria died down considerably. In fact, the financial community has started swinging in the opposite direction as Italy’s interest rates have increased substantially. Greece, Spain, Portugal and Ireland are also facing heavy borrowing costs these days.
Stocks plunged in Europe for the first of the past four trading days today. The Dow Jones Industrial Average in the United States dropped more than 3%. Stocks were unchanged in the Nikkei stock market index.
Whatever hope the Italy and its debtors gained yesterday with Berlusconi’s resignation has been lost. Interest rates forItaly’s 10 year bonds have increased to 7%. The rates for 2-year bonds have jumped almost as high, reaching levels of 6.98%. Italy is likely to have a very difficult time meeting its debt obligations with interest rates at that level. The payments on medium-term bonds were the highest of all, reaching 11.65%. These interest rates are largely a reflection of the fact that Italy’s debt is almost three times as large as all of the other PIIGS nations put together.
Interest rates reaching 7% was seen as the tipping point for other PIIGS nations. Once interest rates reached that level, Greece and Ireland were boxed into a corner and had to start asking for assistance.
According to Reuters, investors are becoming increasingly concerned that they may not be able to get their money back. Many investors have started dumping their Italian bond. Although no one can blame them from separating themselves from the risk, this is likely to raise interest rates further. Inevitably, it could also shut Italy out of the credit markets. Investors are starting to become concerned that the heads of state in Europe may not be able to get the crisis under control.
The sudden increase in interest rates in Italy has prompted the financial community to beg the European Central Bank to step in and save them from disaster. The world is starting to grow concerned that the powers that be may have a more difficult time resolving the crisis. The finance ministers hope to be able to implement a 1 trillion euro bailout fund for the entire region in December. An even larger bailout has been proposed for Greece and Italy, as the debt crisis is so substantial in those countries. Failure to get the debt crisis under control raises the possibility of triggering a global recession.