By: Dr. Mike Campbell

The two nations voted most likely to need the next IMF/EU bailout are Italy and Spain. Predatory investors have their eagle eyes trained on Italy and as a consequence, the bond market is jittery. Last week, the Italian government was able to raise €2.97 billion through the sale of five and fifteen year government bonds, but, as they say, at a price. The continuing concerns over European sovereign debt (and Italy’s in particular) meant that Italy had to offer record interest of 5.9% on its fifteen year bonds and 4.9% for its five year bonds, the costliest issue of such bonds for Italy since June 2008. The bond issue was oversubscribed, but some analysts were surprised that Italy had not put more bonds on the market. By way of comparison, the ECB has just raised its interest rates to 1.5%, so the yields are very generous.

Italy has a deficit of 3.9% of its GDP. Eurozone convergence requirements set the maximum permissible level for this to 3%, but all of that went out of the window with the global financial crisis. Italy hopes to eliminate its deficit by 2014 and has just passed a series of austerity measures which it hopes will save €48 billion over the next three years.

However, the deficit is the least of Italy’s worries. The Italians have a massive debt burden which stands just over €2.04 trillion. If doubts about Italy’s ability to meet its obligations deepen, the nation will be asked to pay cripplingly high interest to attract investors to its bond issues. If confidence can be maintained, then Italy (and just about all of the developed world) can take the necessary moves to reduce their indebtedness to more reasonable levels. If not, or if America defaults on its own debts because agreement cannot be found on borrowing ceilings, we may find ourselves looking back on the global financial crisis as the good old days.