Too big to save?

The eurozone debt crisis continues to rumble along, with Italy now the main focus of concern.

Italy has a record high cost of borrowing, raising fears that it will be unable to service its massive public debts.

The yield on a 10-year Italian bond currently stands at 7.28%; a level manageable in the very short term but unsustainable for long, particularly when the Italian government needs to refinance a huge tranche of debt next year.

7% is seen as the critical level above which an external bailout rescue package is typically required.

The combination of big debts and low economic growth in Italy means it is more vulnerable than Ireland or Spain, both of which have higher debts as a percentage of GDP.

Investment markets across the world have fallen sharply in response to these concerns about Italy.

Banks have been hit particularly hard, again, due to their exposure to European sovereign debt and the debt of other banks.

Contagion (or at least fear of contagion) is one of the biggest issues here.

The bankruptcy of one eurozone nation would lead to others toppling. Unlike Greece, the Italian economy is too big for Germany to rescue without exposing the German taxpayer to unacceptable levels of risk.

It is perhaps unsurprising then that Germany and France are rumoured to be in preliminary talks about break-up of the eurozone.

This outcome is still considered unlikely, although it has prompted European Commission (EC) President Jose Manuel Barroso to issue a warning about the break-up of the single currency. Barroso wants the EU to “unite or face irrelevance”.

Unless decisive action is taken soon, irrelevance is increasingly looking like the outcome for the eurozone. Of course it will not be irrelevant for investors, particularly in the short term.

Photo credit: Flickr/davekellam