Why Italy may need a bailout, too

With little advance warning and declaring it was not a “crisis” meeting, senior European officials today formally discussed Italy’s sovereign debt woes for the first time.

They met in the wake of sharp stock falls last Friday and during spikes today in Italy’s 10-year bond yields that brought alarm that a debt crisis and default talk could spread to large eurozone nations.

Today’s meeting took place around an inconclusive European Union discussion on a second Greek bailout following last year's $110 billion rescue package. The terms of a second bailout are contested – something itself seen as spawning market fears about the struggling “peripheral” states, including Italy, Ireland, Portugal, and Spain.

Analysts say it is not the Greek crisis per se, but the lack of an agreed EU rescue and concomitant political resolve that troubles markets and is bringing a focus on Italy’s position.

The cost of insuring Italian bonds jumped from 5.2 percent to 5.7 percent today, drawing comparison to a similar jump last November in Ireland, a substantially smaller market.

Now, last Friday is being called “black Friday” in Rome after markets plummeted, and after the German newspaper Die Welt published quotes from unnamed officials close to the European Central Bank (ECB) that the current EU bailout fund was not adequate to handle an Italian collapse.

Today’s meeting was called by EU chief Herman Van Rompuy and reportedly included ECB President Jean-Claude Trichet, European Commission chair José Manuel Barroso, EU finance ministers head Jean-Claude Juncker, and leader of the EU economic and monetary section Olli Rehn.

Mr. Trichet on Sunday told an economic gathering in France that Europe was the “epicenter” of a debt crisis that concerned the markets of all advanced economies around the world.

“For Italy it is new data, internal political tensions, and uncertainty,” says Luigi Speranza, a London based economist with French bank BNP Paribas. “For Spain, it is Italy and concern over the banking sector, and uncertainty. But it’s not really about Spain or Italy anymore. It’s about the entire eurozone. It’s quite hard to disentangle it anymore.”

The meetings on Greece remained inconclusive. "We discussed the issues related to the implementation of the decision of the European Council on a new program for Greece and we also exchanged views on recent developments in the euro area," Mr. Van Rompuy said Monday.

Italy’s June 9 stock fall is also seen as sparked by rumors of a growing split between Italian Prime Minister Silvio Berlusconi and his Finance Minister Giulio Tremonti, over the size and specifics of planned austerity cuts. Mr. Berlusconi wants less stringent cuts; but markets in Europe have recently relied more on the assurances of Mr. Tremonti.

Italy’s $2.5 trillion deficit is twice as large as that of Greece, Portugal, and Ireland combined, and rising debt insurance has caused deep worries among investors about the ability of Italy to finance its debt.

Italy has the third largest bond market in the world after the US and Japan. Its sovereign debt is 25 percent of eurozone debt, and its debt-to-GDP ratio is second only to Greece. Italian banks reportedly hold as much as 32 percent of its debt.

Until Italy this week, the greatest shudder in Europe was the possibility of a Spanish crisis, following the bailout of neighboring Portugal.

Some Italian banking officials have said the focus on Italy will diminish once a deal on Greece is secured.

"There has been a speculative attack on Italy in the past few days which is not justified by the fundamentals of either the country or the banks," Antonio Vigni, managing director of Banca Monte Paschi told Reuters news agency.

Andrés Cala contributed reporting from Madrid