Even as the Greek problems refuse to subside for the ailing Euro zone, Italy’s $2.5 trillion debt has ballooned in front of the globe as too big to bailout economy. Italy is the third largest economy in the euro zone with a debt of 120% of their GDP.

Looking at the tumultuous crossover of events with Greece economy almost on the brink of default, market analysts are shuddering on the thoughts of contagion risks and systemic panic spreading across the globe on domino effect of Italy’s debt crisis.

Euro

While the smaller euro zone economies like Ireland and Greece can be handled by the regional authorities and neighboring economies, the rescue of economies of the size of Spain and Italy needs concerted efforts in the form of painful austerity measures, support from international finance institutions and political willingness to sail through the tough and testing times.

Recently, rating agency Moody’s had downgraded Italy’s credit rating by three notches to A2 from Aa2, citing material increase in funding risks and negative outlook towards the ailing economy. The rating downgrade placed Italy lower than Estonia; and on par with Malta and Botswana.

A little earlier than that, the creditworthiness of the euro zone’s third largest economy was also downgraded by Standard & Poor’s to A, from A+. Thus, the evolution of consensus on downward credit rating of Italy has further pushed up government’s debt servicing costs to see its 10-year bond yields at almost a decade high of 6.71%.

On the political front, the investors want to steer clear of the political black clouds hovering over Prime Minister Silvio Berlusconi’s unwillingness to push key financial reforms and tough austerity measures to reduce government spending and increase taxes.

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