| Publication |
2012.
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| Summary/Abstract |
The bond markets turned on Italy in July 2011 as part of a wider loss of confidence in European efforts to manage the sovereign debt crisis. The centre-right government headed by Prime Minister Silvio Berlusconi attempted to head off this change in sentiment by pushing through a package of reforms to promote fiscal consolidation and to stimulate growth. Bond traders shrugged off those actions as too little and too late.
The wider European context played an important role in that assessment. The heads of state and government of the eurozone were already struggling to come up with a second Greek bailout package at the start of the summer. This resulted not only in bitter fights within countries such as Slovakia, Finland and the Netherlands, but also further scrutiny of borrowers in Ireland, Portugal and Spain. Then the European Banking Authority published the results of its second round of stress tests for systemically important European banks. These were designed to calm the markets by factoring in losses on sovereign debt instruments and generating huge volumes of data on cross-border exposure. Instead, the tests merely underscored the belief that the whole European financial system remained fragile.
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