An Italy bailout package is likely to be the next costly move in the spiraling contagion.
Italy on Thursday held its first bond auction since European finance ministers came to Spain's rescue, willing to give the ailing country up to 100 billion euro ($126 billion) to shore up its beleaguered banks.
The auction raised a heap of concerns.
Italy's borrowing costs soared following a Treasury sale of 4.5 billion euros of debt, including 3 billion euros of its 3-year benchmark bond that yields a lofty 5.3%. That was the highest yield since December and an increase of nearly 1.4 percentage points from the last sale just a month ago.
In addition, Fitch Ratings reported May 23 that foreign ownership of Italian debt slipped from 50% in 2008 to a current 32%.
"I think Italy could well be a problem, because its current government isn't very good and has no legitimacy, having been imposed by the EU – and it hasn't cut spending as it needs to," said Money Morning Global Investing Strategist Martin Hutchinson. "I'd put it a few weeks away though – market's focused on Greece and Spain at present."
Closer to an Italy Bailout Package
Italy's Prime Minister Mario Monti is attempting to convince investors that Italy is a safe investment, underscoring the fact that the country's budget deficit and jobless rate is less than half of its struggling neighbor Spain.
But his case is a hard sell.
Darren Sinden of Silverwind Securities told CNBC that while the EU may be able to restrain Spain's circumstances, Italy is a whole other matter.
"Italy is far too big for the EU to really do anything about," said Sinden.
Italian bonds have been moving in tandem with Spanish debt since Spain's recue request made headlines on June 9. The yield on the Italian 10-year bond ticked up more than 50 basis points in the four trading days following the salvage proposal.
Markus Huber, head of German sales trading at ETX Capital in London wrote in a note to Bloomberg News, "[Thursday's] auction most likely won't manage to restore much calm in the markets, instead it rather reflects quite well how risk averse investors have become and how uncertainty within the euro zone and the European financial crisis itself continue to dominate the headlines and market action."
The elevation in Italy's borrowing costs, coupled with Moody's downgrade Wednesday of Spain's debt to just one notch above junk status, weighs heavily on European leaders to implement drastic measures to halt the impending ripple effects should Spain and Italy need a full-scale bailout.
Greece a Sideshow
Recognizing the importance of the Eurozone and its 17 member nations, German Chancellor Angela Merkel said Thursday that she is "convinced" Europe is Germany's future, stating that the country does not have the means to solve the region's current economic calamity on its own.
"If the euro fails, Europe fails. But we also know that our strength is not unlimited," Merkel said in parliament in Berlin.
Monti, Merkel, and French President Francois Hollande will all convene for a G20 meeting in Mexico over the weekend as Greek voters head to the polls to decide in a critical election if they will exit the euro and return to the country's original currency, the drachma. Markets have been jittery for weeks ahead of the Greek vote.
With the debt drama developing in other countries, Silverwind's Sinden told CNBC that Greece's election is "a bit of a sideshow given what's going on in Spain and now with the concern about the spillover in Italy."
The decision for an Italy bailout package could be made in the next few weeks. For more detail on what's ahead in the Eurozone bailout saga, check out this Q&A with Money Morning Chief Investment Strategist Keith Fitz-Gerald.
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Spain worse off post bailout; Italy also threat: Silverwind