Italy, Spain on bailout precipice

Borrowing costs for Italy and Spain have surged drastically as traders rush to rid themselves of risky investments. Despite the fact that Italy held crisis talks with the EU, Prime Minister Silvio Berlusconi stopped short of asking for a bailout.

After a volatile day in the markets during which Italy’s borrowing rates reached their highest level since the euro was adopted, Berlusconi addressed the country’s parliament.

Berlusconi did not call for a bailout and said he wants to stabilize and reduce Italy’s debt. He noted that Italy’s banks recently went through stress tests which showed that they were solid and capable of going through another crisis. 

There has been fear that a bailout might be Italy’s next step after crisis talks were held between Italy's finance minister, Giulio Tremonti, and the chairman of the Eurogroup, Jean-Claude Juncker.

Italy's borrowing costs have hit a new euro-era high, having spiked 0.19 of a percentage point to 6.21 per cent on Wednesday, amid ongoing fears that Europe's debt crisis could spread to the country.

Italy’s Parliament passed a huge 43-billion-euro austerity package last month, but there is some doubt as to whether or not the government will be able to implement the cuts, as it seems the Italian people are not going to accept it. They are going to plan a national strike if the government goes through with these cuts.

Spain’s economy is also in danger, as Spain's borrowing costs rose 0.09 of a point to 6.34 per cent. Prime Minister Jose Luis Rodriguez Zapatero has delayed his vacation by a day to monitor the issue.

As Deutsche Bank has reduced Italy's bond holdings, cutting its exposure to the country's debt by 88 per cent in the first half of 2011, economics journalist Patrick Young claims all the big banks are moving very quickly to get out of this debt.

“If a bank like Deutsche Bank says ‘we don’t want to hold Italian government bonds,’ then lots of other foreign investors are going to say ‘gosh, Deutsche Bank could be on to something, we don’t want to buy those bonds either,’” he said. “And the problem for Italy is it has a lot of refunding coming up in the course of the next six months. In other words, it needs to sell a lot of debt.”

Patrick Young believes some of the bonds have to go bust or to be restructured, and ultimately some pain must be borne by the banks.

“Ultimately, banks are going to have to lose money as part of this entire play,” he said. “They originally bought a lot of these bonds thinking there would be an endless nirvana of cheap interest rates for all of these countries. And effectively the game is up, that play is over, governments need to step in, they need to restructure the market and we actually need to see that demon D-word – default.”

Spanish and Italian bond yields surged less than two weeks after Greece's second huge rescue package aimed at staving off the contagion. Patrick Young says that if Italy or Spain asks for a bailout there simply is not going to be enough money in the EU fund in order to manage to pay it.

“The eurozone bailout fund is on the verge of running out of money as soon as one of those major economies such as Spain or Italy defaults,” Young told RT. “Every day the market is saying it is terrified of the debt that has been built up in the system and it is upheld by the fact that nobody in the eurozone wants to actually lead us out of this problem.”

Young believes these bailouts are effectively “throwing aspirin to cure appendicitis,” instead of attacking the problem at its roots.

“Now gradually everyone is getting appendicitis throughout the eurozone,” he said. “Unfortunately, the way to cure appendicitis is actually surgery.”