Italian bond yields continue to remain over 7% this morning in Europe but they have come down and are not as high as the 7.4 % level that was reached yesterday.
The fear of debt contagion is growing more palpable.
The German 10 yr. bond yield spread compared to the Spanish yield is growing and has reached a new record level. The Spanish yield is currently at 5.89% according to Bloomberg.
The European Central Bank (ECB) is worried about inflation growing in the Euro zone and has resisted calls to become the “lender of last resort” for Europe’s trouble spots like Italy.
However, Bloomberg just reported that their sources are telling them that the ECB are now buying Italian debt- government bonds.
Pressure will only grow stronger for the ECB to intervene if the European markets continue to slide and Italy’s bond yield grows higher. There are growing liquidity fears.
The outlook for European growth in 2012 is marginal at best. The EU just cut their Euroe zone GDP growth forecast to 0.5 %. Some analysts claim that a recession is nearly underway in Europe.
Italy’s fragile economy
Tomorrow Italy’s parliament will vote on a proposed austerity plan. Prime Minister Berlusconi is expected to step down. Italy’s government leaders will be left deciding who will take fill Berlusconi’s position.
Adopting tough austerity measures throughout Italy will reduce government spending levels and certainly provide the Italian government with more capital to pay down their debts.
However, taking a course of tough austerity measures has the capacity to cripple the Italian economy with consumer spending, business development, and investment. These are the drivers of growth and jobs in Italy.
Stimulating aggregate demand (the demand for the gross domestic product of a country) in Italy’s economy is crucially needed to pay down their huge debt ($2.6 trillion).
Italy accounts for 17 percent of the eurozone’s gross domestic product.
But a significant part of Italy’s debt must be rolled over in coming months. Italy needs to raise 300 billion Euro ($412 billion) in 2012 and manage their interest rates which have been climbing to record levels.