Berlusconi on the brink – but do Italy’s problems spell insolvency?

8th November 2011

With the yield rate of Italy's 10-year bonds staying above 6 percent, commentators see Italy as heading to the frontline of Europe debt crisis battle, as the lead candidate for the contagion among Europe's big economies.

Alex Brummer on This is Money says the surge in Italian bond yields to their highest level since the birth of the eurozone in 1999 underlines the shift of the crisis in the region from the periphery to the very core.

Meanwhile, the Daily Telegraph adds that the yield highs cross the threshold economists say is unsustainable for the country's €1.9 trillion debt pile – there is frantic speculation that Italy will require an international bail-out.

The overwhelming view is that Italy will be deemed insolvent by markets, sending them into another tailspin.

But is Italy really on the brink?

Dig a little deeper, and the picture changes

Commenters on Mindful Money Shaun Richards' blog believe the media line to be overstated, and have found evidence to support this hidden in news coverage.

JW says: "Shaun, buried deep in the Telegraph's blogs (because it doesn't support the normal paper's line) is a blog saying that Italy is neither insolvent nor illiquid. Italy has problems but they are completely overstated."

Andrew Lilico says on the blog: "Recent days have seen a spiking up in Italian bond yields and a rise in the spread over German bunds. Many commentators are now suggesting or implying that we are approaching the point at which a liquidity crisis for Italy might turn into a solvency crisis.

"I find this an extraordinary claim, greatly at variance with the data and historic experience. If it is in any sense true, that can only be for the most brutish of political reasons… recent bond yields do indeed constitute euro-era highs. But before the euro, Italy had far higher yields and did not default."

Prompting some debate, Shaun Richards adds in reply that he believes Italy may be on the brink of insolvency – but for her to be insolvent bond yields would have to remain at high levels for a sustained period.

He adds in response to JW on his blog that Andrew misses several key points on Italy's Euro membership:

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