Fear grows over Europe debt woes as Italy falters
NEW YORK -- Renewed fears that Europe won't be able to stop its debt crisis, now centered in small countries such as Greece, from infecting bigger eurozone economies such as Italy sent stocks down Wednesday.
In a sign that the eurozone's crisis may be entering a more dangerous phase, yields on 10-year Italian government bonds spiked above 7% Wednesday, an unsustainable level that makes it more costly for Italy to service its $2.6 trillion debt and puts the eurozone's third-largest economy in danger of needing a bailout.
Fearing that a banking crisis and recession could engulf Europe if Italy's troubles are not resolved in a timely manner by European central bankers and policymakers, investors sent the Dow Jones industrials down 389 points, or 3.2%, to 11,781.
The fact that Italy's bond yields climbed to almost 7.5% — a record — amid political turmoil was a worrisome development. The reason: Similarly high borrowing costs facing other highly indebted European countries in the past 18 months ultimately led those countries to seek and receive bailouts.
"In our view, 7% is a 'tipping point' for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance," noted Rod Smyth of RiverFront Investment Group.
The reason Italy's woes have created so much anxiety on Wall Street is because of its economic clout in the eurozone. They also come at a time when markets have been whipsawed by confusion surrounding the proposed plan to bail out Greece.
"Italy is different than Greece," says David Kelly, chief market strategist at J.P. Morgan Funds. "It is big."
Europe's current plan to save Greece lacks the firepower to do the same for Italy. "While Italy is considered to be too big to fail, she may be too big to save unless there is a major change of attitude toward resolving the crisis," John Higgins of Capital Economics wrote to clients early Wednesday.
U.S. investors fear the latest problems in Europe will further boost anxiety levels in global markets and further crimp global economic growth. Such a slowdown would hurt sales and profits of U.S. businesses that do business in Europe.
Italian bond yields spiked amid political uncertainty after Prime Minister Silvio Berlusconi said Tuesday that he would resign after parliament passes next year's austerity plan. Analysts say the European Central Bank must get more aggressive if Italy's problems are to be contained and a default avoided.
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