On Dec. 30, when Spain’s new government said 2011’s budget deficit would reach 8 percent of output, 2 percent more than the previous government had projected and more than the 6.9 percent expected by economists surveyed by Bloomberg. Prime Minister Mariano Rajoy responded by unveiling a new package of spending cuts and tax increases.
The key to the euro’s survival may lie with Italy, the group’s third-largest economy and the second most-indebted after Greece. The government in Rome must repay 53 billion euros in debt in the first quarter, about a third of the euro area’s total amount for the period, after Prime Minister Mario Monti passed an emergency budget package aimed at curtailing borrowing costs.
Italy’s 10-year yield ended 2011 near the 7 percent mark that led Greece, Ireland and Portugal to seek bailouts. Spain’s equivalent yield finished the year just above 5 percent.
“If the Italian yields start to rise, you could quickly turn a manageable situation into an insolvent one,” Michael Spence, a professor of economics at New York University and a Nobel laureate, said on Bloomberg Television Dec. 28. “Italy needs time and Europe needs to help buy them some of the time.”
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