The metaphor of choice during the euro-area crisis has been that of dominoes falling. First came Greece, then Ireland, and then Portugal; next in line would be Spain. The fear now, with Italian government bonds suffering another day of widening spreads, is that contagion will strike less predictably, The Economist Schumpeter blog reported. Less like dominoes, in other words, and more like pub skittles.
The latest jitters about Italy, whose debt ratio is second only to Greece’s in the euro zone, seem to have been sparked by speculation about the future of Giulio Tremonti, the Italian finance minister. But the inability of euro-area policymakers to resolve Greece’s debt crisis, and this week’s Moody’s downgrade of Portugal, have not helped. Spreads between Italian ten-year bonds and German Bunds have today hit another euro-era record. Domestic financial institutions have been hit, too: shares in Unicredit, a big bank, were suspended today after a sharp fall, and credit-default-swap spreads on Generali, an insurer, have surged as well.
If Spain has long been considered too big to fail, then a full-blown Italian debt crisis would be cataclysmic. The country’s bond market is the third-largest in the world, after America’s and Japan’s. That has been seen as a source of a comfort: bond investors find it hard to avoid a market that big and liquid. But it is also a source of widespread financial infection. Read more.
