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Italy Is Looking Like Europe's Next Disaster

High debt, capital flight, unfinished reform could set Italy up for a fall
Italy Is Looking Like Europe's Next Disaster
Photograph by Roger Dohmen/Hollandse Hoogte/Redux

“We’ve been gradually feeling better about Europe.”  “The breakup sentiment is diminishing.”  “The expectation of a doomsday scenario in the euro region has passed.” That’s what the experts were saying in mid-March after a successful Greek debt writedown. So much for springtime flights of fancy. Three months later, a doomsday scenario for Europe is back in the headlines, and the focus of fear is now on Italy.

The euro zone’s third-biggest economy is seen as the next domino at risk of toppling after the European Union’s June 9 deal to lend Spain $125 billion in bank bailout funds. Yields on Italy’s 10-year government bonds reached 6.2 percent on June 13, up from just 4.8 percent in March. By pushing up Italy’s borrowing costs out of fear of default, investors are making a default more likely. “The loser in the Spanish deal is Italy. It’s now the only southern European country that is standing alone” without official support, says Marc Chandler, chief currency strategist at Brown Brothers Harriman.