Italy’s borrowing costs soar as Italian bond yields reach critical level

Today stock markets in Europe and the U.S. have plunged more than 2% after bond yields on Italy’s 10 year bonds reached 7.46% up from the mid 6 % range earlier in the week. Yields above 7% are considered to be unsustainable for Italy’s economy to recover and pay down Italy’s massive debt of 1.9 trillion euros ($2.6 trillion).

Italy is faced with having to raise up to 400 billion euros next year to pay down their debts. In sharp contrast, the German government borrows money at an interest rate of 1.78%, a low borrowing level to sustain their economy and  keep it growing.

Yesterday the markets rallied over 1% on news that Italy’s Prime Minister Berlusconi had finally gave in to pressure and would resign after new austerity measures are passed in Italy.

Chris Turner, head of foreign exchange strategy at Ing told Reuters today that he is concerned about the dollar, “Euro/dollar looks incredibly vulnerable at the moment. Everyone has concluded that the only buyer of Italian debt is the ECB… you need a much larger risk premium in the euro and it’s not clear where this is going to end.”

European Union officials have been planning for this dangerous rise in Italy’s 10 year bond for weeks. But the Italian government in Rome has still not asked for help thus far.

Until the European Rescue Fund (known as the EFSF) leverages its capacity up from the 440 billion euros of government guarantees it currently contains to the trillion level that European Union leaders desire, there is little hope for the fund to make much difference.

The shoring up of the EFSF’s firepower, including an investment fund to attract Chinese or Russian interest managed by the IMF, still won’t be ready before February, the EU finance chief disclosed earlier this week.

A plan to use the EFSF to insure debt issued by weak economies such as Italy can’t help either since it won’t be available until December.

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