It will take a long time for the new Italian government to restore confidence in the nation’s debt. An auction of $4.1 billion in five-year notes produced a gross yield of 6.2%. CNBC reports that the yield was 5.3% in a similar auction in October. The cable news service also reported that “The yield on Italy’s bonds hit a new euro lifetime high.”
The yield shows that the markets have no interest in Mario Monti’s election as Italy’s new prime minister. He cannot change his country’s stagnating economy or the burden of its 1.9 trillion euro debt. High unemployment, combined with a GDP that will likely contract and austerity that could make the economy shrink more quickly, is seen as a disaster by many capital market investors. As these investors sell Italian debt and refuse to buy more unless yields are remarkably high, Italy falls further into a hole where it cannot raise money at interest rates that its deficit-riddled national budget can sustain.
The only measurement of Italy’s health, both now and in the forecast future, is the amount it must pay to raise capital. If yields remain high for several more weeks, there is every reason to believe that Italy will need outside aid. And, it is aid that few think the eurozone can afford to give. Italians hoped their new government would engender some level of confidence in the country’s finances. It did not.
Douglas A. McIntyre
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