Eurozone spotlight shifts to Italy

Italy_under_scrutinyYields on ten-year Italian government bonds hit a high of 6.66% this morning, another sign that the markets won't tolerate Italy's high level of sovereign debt, which is estimated to be 120% of its GDP.

Investors are worried that the country's fragile government won't push through the reforms necessary to control its debt burden. Several Italian media outlets are today speculating that prime minister Silvio Berlusconi will resign, though he has denied this.

Italy's economic problems are less severe than those of Greece and the country is believed to be running a primary surplus. But the bond market is punishing Italy for its high debt levels, and this threatens to push the country into the kind of situation seen in Greece.

If Italy's situation were to deteriorate, the consequences for the eurozone would be disastrous. The country is the third-biggest economy in the eurozone.

“The current feeling is that Italy is too large to bail out with the current mechanisms in place, should Greek-like turmoil spread to Italy,” said Peter O'Flanagan, head of foreign exchange trading at Clear Currency.

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