Tax evasion in Italy estimated to amount to 20% of gross domestic product.

Euro crisis: Italy at risk of insolvency, European finance ministers warned
Mario Monti must tackle Italian tax evasion to avoid other eurozone economies being damaged, says report



Ian Traynor, Brussels
guardian.co.uk, Tuesday 29 November 2011 12.51 EST



European finance ministers were warned on Tuesday night that Italy's liquidity crisis could leave the eurozone's third biggest economy insolvent with devastating impact on the fate of the single currency and its big core economies, Germany and France.

Eurozone finance ministers met in Brussels in their latest attempt to plot a path out of the EU's worst crisis. With Mario Monti, the new Italian prime minister and finance minister, reporting to the session on his austerity package aimed at saving Italy and shoring up the euro, a confidential report from the European commission and the European Central Bank said Monti would need to do more than already promised.

The report, obtained by the Guardian, said Monti had to go further in his promises to combat rampant tax evasion in Italy, which is estimated to amount to 20% of gross domestic product.

"The sovereign debt crisis has now moved from the periphery to Italy and other core euro area countries. Pressure on Italian sovereign bond yields is particularly acute, reflecting investors' mounting concerns with the sustainability of Italy's large public debt" – almost €2tn, (£1.7tn) – the report said.

"The risks of a full-blown sovereign liquidity crisis can increase rapidly in the absence of a determined policy response … Persistently high interest rates increase the risk of a self-fulfilling 'run' from Italy's sovereign debt. A liquidity crisis could then turn into a solvency crisis, whose repercussions for other large euro area countries would be very acute given their exposure to the Italian economy."

Italy on Tuesday easily raised €7.5bn on the bond markets, but at exorbitant rates above the 7% sustainability threshold.

The European finance ministers were expected to agree to release €8bn in bailout funds to Greece, the latest tranche, after months of haggling over whether Athens had done enough to warrant the receipt and the fall of the Papandreou government. Klaus Regling, head of the European financial stability facility, the main bailout fund, was expected to disappoint the 17 governments by telling them there was little chance of leveraging the €250bn pot of money into a trillion-plus war chest by drawing in Asian investors and sovereign wealth funds.

The leveraging plan was drawn up by eurozone leaders at a summit a month ago. "It doesn't look like it will be [multiplied] 4-5 times," said a Brussels diplomat. "More like 2.5 times. That's probably not enough to restore confidence in Italy or Spain."

Tuesday night's meeting came ahead of another crucial summit of EU leaders next week at which Germany and France, while still at odds over central details, will launch a drive for a eurozone "fiscal union", with governments required to forfeit national powers over fiscal, budget, tax and spending policies to a eurozone body. Angela Merkel, the German chancellor, is the biggest obstacle to any prompt and radical action aimed at stabilising the bond markets and ring-fencing the euro. Others, led by France, want the European Central Bank to be given interventionist powers to defend the currency, print money, and act as lender of last resort as well as the pooling of eurozone debt through the issue of common euro bonds.

Merkel is fiercely opposed to both options, insisting instead on reopening the EU's Lisbon Treaty to entrench new disciplines and intrusive powers of scrutiny over eurozone national budgets. Rather than focus on solving the immediate crisis, Merkel's priority is to create a durable new system eliminating the chances of a recurrence. Launching eurobonds and empowering the ECB to intervene, said Wolfgang Schäuble, German finance minister, would mean "no European country would retain its triple-A rating". "The Germans want treaty change without eurobonds. The others want eurobonds without treaty change," said the diplomat. "In the end the Germans are in control of this."

666 - The Italian 10 Year Bond Just Hit 6.66%

GUARDIAN

Greece locked in coalition talks as Italy's borrowing costs soar - live

• Negotiations over a new Greek unity government continue
• Italian 10-year bond yields hit 6.66%

The yield (or interest rate) on a 10-year just hit 6.66% - which, according to Reuters data, it its highest point since 1997 (when Italy was suffering another financial crisis) - from 6.353% overnight.

That is a huge move in the context of an average day in the bond markets. For context, 6% is generally seen as the start of the 'danger zone' where the cost of borrowing becomes prohibitively expensive (although the Bank of Italy argues that it can cope with 8%).

Italian bond yields have closed above the 6% mark for the last six days, despite the European Central Bank buying up tens billions of euros of Italian debt last week.

The steady rise in Italian bond yields is alarming the City. As Gary Jenkins of Evolution Securities explained this morning:

As calls grow for Silvio Berlusconi to step aside, he faces a key test of his leadership on Tuesday with members of the lower house of Parliament due to vote on public finances.

There has been a lot of speculation that a different leader would lead to a sharp retraction in Italian bond yields. That might well be the case in the short term but considering the starting debt position, the economic outlook and the general lack of confidence in Italian debt it promises to be a challenging period of time for any Italian leader.

Last Friday, Berlusconi denied that the Italian economy as in trouble, pointing out that its restaurants remain full.