Italy enters the debt crisis after Spain rescue

ROME: The 100 billion euro ($126 billion) rescue for Spain's banks moved Italy to the frontline of Europe's debt crisis as an initial rally in the country's bonds fizzled on concern it may be the next to succumb.

Italy's 10-year bonds reversed early gains on Monday in the first trading after the Spanish bailout and declined for a fourth day, sending the yield up 7 basis points to 5.84%.

"The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain," Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said in an interview.

"This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds."

Italy has 2 trillion euros of debt, more as a share of its economy than any advanced nation after Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.

Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros in emergency loans from the euro area to shore up a banking system hobbled by more than 180 billion euros of bad assets.

Mounting concern about the state of Spain's banks and public finances drove the country's borrowing costs to near euro-era records last month, dragging up Italian rates in the process.

Investors initially appeared relieved by the news, with the euro gaining as much as 1% and the yield on Spain and Italy's 10-year bonds falling 12 basis points and 15 basis points. Both gave up their gains.

"The problem for Italy is that where Spain goes, there's always the perception that Italy could follow," Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an interview.

"There is insufficient differentiation within the financial markets. It is clear as the light of day and has been that Spain's fundamentals are a lot direr than Italy's. That hasn't stopped Italy suffering from Spanish contagion."

The jobless rate is less than half of Spain's 24 percent, and Italy didn't suffer a real estate bust, leaving its banks healthy by southern European standards. The budget deficit was 3.9 percent of GDP last year, less than half that of Spain.

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