Italy, Spain rates 'dangerous but manageable'

Italy and Spain's borrowing costs are at dangerous but manageable levels, and both countries must move fast to regain market confidence because the EU cannot bail them out, analysts say. Investors are worried -- Rome and Madrid have been forced to pay much higher rates on their bonds this week as Italy scrambles to form a new government and Spain sees a return of jitters before a general election on November 20. Under intense pressure from the markets, the rate on Italian 10-year bonds -- used as a reference to gauge the country's economic health -- shot up to 7.013 percent on Tuesday, while Spain's rose to 6.298 percent. While the levels are considered dangerous -- because the countries risk no longer being able to borrow money on commercial markets -- analysts say it is difficult to pin down at what level exactly the rates become unsustainable. "We said 6.0 percent, we're now saying 7.0 percent. But it depends on how long it lasts," said Jean-Francois Robin, bond strategist with Natixis bank. Should Italian bond levels remain at 7.0 next year, the extra cost to the country would be 7 billion euros ($9.5 billion) -- "not all that expensive" for a country which should have a primary surplus this year," Robin said. According to the results of a "resistance test" carried out by the Bank of Italy, the country's colossal debt -- worth around 120 percent of gross domestic product (GDP) -- would be "sustainable" even at rates of 8.0 percent. In Spain, Daniel Pingarron from IG Markets brokerage house said the country "can finance itself for the moment, even if it pays a lot," but added that a rise to 7.0 percent on bond rates would be a "barrier." Alberto Roldan, from Inverseguros brokers, said access to the markets would only become impossible "once interest rates pass 7.0 percent of GDP." Italy's stands this year at 4.8 percent, while Spain's is just 2.3 percent. "Spain can therefore hold out a bit longer," particularly as its debt comes in at 65 percent of GDP -- almost half of Italy's, Roldan said. The two countries' refinancing needs next year will be about 300 billion euros for Italy, and about 100 billion euros for Spain. But as both suffer from anaemic growth, interest on their debt could rise, forcing them to impose harsh new budget cuts in order to meet economic targets. This "vicious circle" can create problems in the long term. In any case, Italy and Spain will have to act fast to regain market confidence because the European Union does not have the means to save them from a crisis. "It is necessary to show that the country is reformed to boost growth and in Italy, Mario Monti needs to get to work," Robin said, in reference to the technocrat appointed to lead Italy's government through the storm. Both Italy and Spain have the added advantage that domestic investors hold a large proportion of the debt -- 58 percent for Italy, the central bank said. European funds pumped into Ireland, Portugal and Greece to save them from bankruptcy "cannot be used for Italy and Spain. The EU does not have the money to save them." The idea is no more than "science fiction." said Pingarron. The International Monetary Fund has already doled out 44 billion euros worth of credit lines, but its offer to supply them to Italy was turned down, according to reports. In order to be completely secure, Rome would need "250 billion a year" in bailout funds which simply could not be raised, Robin said. "The conclusion is that it would be good for the European Central Bank to keep the rate" at 6.0 percent by buying up more debt, he said. But that is a whole other headache as the ECB has refused to do so, arguing that it is up to politicians to manage the crisis.