Leading article: ECB intervention on a dramatic scale is needed

Italy's debt crisis is more capable than Greece's of bringing the whole house down
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The Independent Online

We've been through so many euro crises by now, so many desperate cries, that this time disaster looms, the moment when not just one country but the whole eurozone may be breaking up, that one is tempted to treat the latest crisis over Italy with a roll of the eyes. But it is serious now, far more serious than the Greek crisis and far more capable of bringing down the whole house.

Once a country has to pay more than 7 per cent on its borrowings – and Italy is actually having to pay 8 per cent on one-year bonds on yesterday's market rates – it is incurring costs that even the strongest nation cannot hope to sustain. And the worst of it is that this is happening just when the announcement of Prime Minister Silvio Berlusconi's intention to resign was expected to help settle the markets, not spook them even further.

Just why the investors should have behaved this way is still confused. It may be the manner of Mr Berlusconi's passing; his desire to stay on to see through current austerity measures left the formation of a new government up in the air, adding to the air of uncertainty over the future. Where in Greece the course has been fairly clearly set with negotiations for a government of national unity leading to elections early next year, in Italy still no one knows what will happen. Nor were the markets helped by LCH Clearnet, a clearing house for debt, asking for a substantially higher deposit for trading Italian debt.

But the underlying fact is that this crisis has been building up for months and the authorities and governments have simply failed to nip it in the bud from early on.

They could have done something during the summer, when the markets began to move the searchlight of concern from Greece, which on the numbers could (and should) have been contained, to Italy, where the numbers were far larger than any support operation was geared up for. They had a chance at the beginning of the month when EU premiers met in a crisis summit.

Still another opportunity came last week when the leaders of the G20 met in Cannes and all that could be agreed was promises of support to the IMF but no numbers.

What the markets are now saying is that the time for talk and prevarication is over. Only decisive action will convince them that Italy is a safe enough bet to lend money to without demanding a high rate to cover the risk of default. The means are there, in the European Central Bank (ECB) and the International Monetary Fund, if only eurozone governments and the international community were willing to deploy them. Italy's problems are not insurmountable. Its debt in round numbers (€1.9 trillion) and in terms of its proportion of GDP (120 per cent) may be huge, but its annual budget deficit is less than the UK's and under reasonable interest rates manageable. Its problem is both the short-term uncertainty of its politics – Mr Berlusconi is as much a symptom as a cause of its inability to manage its economy better – and the fact that so much of its debt (€340bn) is due for renewal over the next year.

Germany, for all the resistance of its voters, must release the ECB to buy up Italian debt. The bank is already doing it on new Italian bonds, it needs now to do it on a scale that forces down rates of purchase in the secondary market. Turmoil in the currency and stock markets destabilising the currency is more than an adequate reason for overriding political objections now.

Then if the UK, among others, would come up with the numbers for the IMF, the fund could step in with loans to ease the burden as it did with the Irish and Portuguese. Long term, all kinds of question about the future of the euro can be raised. Short term, only action – and on a dramatic scale – will work.