Wednesday, 9 November 2011

Berlusconi bounce lasts less than 12 hours

He may be on the way out but Silvio's announcement last night does not appear to have calmed the nerves of bond traders.

The country's 10-year bond yields have reached 8 per cent, a level higher than that which the Irish and Portuguese precedent suggests a bailout is necessary.

As Robert Peston points out

The subtler, more important point, is that when the implicit interest rate rises to that kind of level, investors know that a country with big debts can't afford to repay what it owes, so they stop lending to said country, they go on strike. No one wants to lend to a country when that country would use the loan to pay the interest on previous loans - that's throwing good money after bad.

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