Spanish and Italian borrowing costs rise – FT.com

Spanish and Italian borrowing costs rise – FT.com.

This article talks about the latest move upward of Spanish and Italian bond yields. In the early 90’s Italian 10-yr bonds yielded over 14%, but now 7% is considered too expensive for financing. Why is this? At one point, Italy accepted those high yields and budgeted more money to pay for debt servicing. Additionally, Italy could (and did) devalue the lira so that a 14% rate was not onerous.

Those two factors have changed. No one has budgeted for higher debt service, so Italy must cut it budget more just to keep the same budget deficit. That means less spending on services, which is making the downturn worse by taking money out of the pockets of consumers. This action is lowering tax receipts. Italy does not have a currency to devalue, so it is essentially stuck in this spiral.

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