Euro Problems Need Fixing Before Financial Markets Lose Their Faith: View

http://www.bloomberg.com/news/2011-08-04/euro-s-problems-need-fixing-before-markets-lose-faith-view.html?cmpid=

The market for Italian and Spanish government bonds offers an indication of how little confidence Europe’s most recent package of rescue measures has inspired. As of Wednesday, the yield on the 10-year Italian bond stood at 6.08 percent, near its highest point since the introduction of the euro. The yield was about 3.7 percentage points higher than the yield on 10-year German bonds -- a spread that suggests rising concern that Italymight default. The comparable spread on Spain’s 10-year bond was 3.9 percentage points, up from 3.2 a month earlier. Belgium’s spread hit a euro-era high of 2.1 percentage points.

Debt Burden

Consider Italy, which carries the euro area’s second-largest debt burden after Greece. At a 5 percent cost of borrowing, the government must run a budget surplus of about 29 billion euros a year -- not including interest payments -- to stabilize its gross government debt at its current level of about 120 percent of annual economic output. At a 10 percent cost of borrowing, the required surplus rises to about 125 billion euros, or one-sixth of all government revenue. That’s roughly what the government spends every year on Italy’s largely state-run health system. At some point, default becomes a necessity.