While Eurozone leaders are off sunning themselves around the beaches of Europe the Italian and Spanish economies have been taking a roasting at the hands of the markets. Italian and Spanish ten year cost of borrowing hit record highs, reaching close to 6.25% and 6.45% respectively – disturbingly close to the 7% threshold, beyond which history has shown (read Greek, Irish and Portuguese bailouts) that financial markets really start to lose faith in the sustainability of large debt burdens. We also saw the Italian and Spanish stock markets take a battering yesterday, with Italian banks in particular seeing huge drops in their share prices, mostly due to the mountains of Italy government debt which they have hoarded onto their books in the past few years. Additionally, credit default swap prices (used as insurance against a default) on Italy, Spain and France hit record highs as markets fretted over the long term stability of the eurozone (despite the fact that the Greek deal significantly undermined their reliability).
To its credit the Italian government seems to be realising that more needs to be done to assuage the markets. Finance Minister Giulio Tremonti called a meeting of the Financial Stability Committee - made up of representatives of the government, the Bank of Italy, market regulator Consob and insurance authority ISVAP – for this afternoon to discuss the renewed fears surrounding the Italian economy. Prime Minister Silvio Berlusconi will also address both Houses of the Italian Parliament tomorrow, after remaining relatively silent on the crisis so far (although given his track record for verbal gaffes we’re not certain whether this is a good thing or not!)
Spanish Prime Minister Jose Luis Rodriguez Zapatero also moved to delay his departure on holiday in order "to more closely monitor the evolution of the economic indicators", according to a government spokesman. Although, El Pais reports that he has only delayed it by a few hours, so clearly he doesn’t plan to come up with any ground breaking solutions…
We hope eurozone leaders are enjoying their holidays and not getting burnt as badly as some of their economies are during their absence.