Europe's debt crisis is going from bad to worse, with Italy on Friday hit hard as a result of its crippling debts.
The borrowing rates for troubled, and even not-so-troubled, European governments soared again, heightening the danger of an all-out collapse in Europe's common currency, the euro. It comes as political leaders across the continent are all pointing to each other as needing to act to avert a worse outcome.
The danger is most pressing in Italy, where the rate the nation must pay to borrow money for a decade rose Friday for the fifth straight day, to 7.23 percent from 6.64 percent a week ago. The increase came in an auction of new bonds for which demand was weak, pushing the rate the Italian government must pay to borrow money for two years up four-tenths of a percentage point, a remarkably big one-day jump, to 7.5 percent — higher than the 7 percent threshold that forced other euro nations into bailouts.
But driving market fears is the knowledge that Italy is too big for Europe to bail out.
With debt totaling 120 percent of Italy's economy, higher rates could create a dangerous, self-reinforcing spiral for Italy: the higher its borrowing costs, the more onerous the interest payments. That in turn increases the likelihood of economy-cratering tax increases and spending cuts or a catastrophic default on the $2.6 trillion in debt.
Over recent days, the sense of impending threat has even spread to nations that have generally sound finances. Standard & Poor's cut its long-term credit rating for Belgium to AA on Friday from AA+, expressing concern that the nation may have to engage in costly bank bailouts that will strain its finances.
Nations that have seen a sharp runup in their borrowing costs in recent days also include France, Austria and Finland.
Investors are selling off bonds of almost all European nations out of fear that a self-reinforcing cycle is taking hold in which higher borrowing costs further strain governments' finances, threatening losses among the banks that own government debt and further slowing an economy that is already on the brink of recession.
When this same set of circumstances has developed in the past two years, some combination of stronger European nations and the European Central Bank has acted to promise a wall of money to stop the cycle in its tracks.
Today, however, "it appears Europe's fiscally stronger sovereigns are reaching their limits in terms of supporting their fiscally weaker counterparts," said Piero Ghezzi, an economist at Barclays Capital.
In other words, after creating and then expanding the size of the European Financial Stability Fund, and after more than $260 billion in bond purchases by the central bank, both the governments and the central bank are saying "no more" until Italy and other weaker countries make major changes to their tax and regulatory systems.
European leaders have, however, been discussing in more detail ways they might integrate their fiscal policies more extensively. Successfully doing so could instill investor confidence and give the central bank greater comfort in using its power to print money to backstop the continent's finances.
But many residents of the countries involved are reluctant to back their neighbors' debts. A poll by the German television network ZDF found that 79 percent of Germans opposed jointly issued euro bonds, according to the Associated Press, compared with 15 percent who favored the idea.
In the near future, investors will probably be watching scheduled auctions of Spanish bonds on Thursday and Italian bonds on Monday and Tuesday. If buyers show up as usual and buy the bonds at reasonably normal prices, it could help instill confidence. By contrast, if buyers eschew the auctions, driving the prices of the bonds down and interest rates up, the crisis could deepen.
Italian Prime Minister Mario Monti, who replaced Silvio Berlusconi a week ago, may be running out of time to reassure nervous investors that his government has a strategy to deal with Italy's crippling debts.
"Mario Monti has failed so far to impress bond markets he has the power and authority to do what is required," said Louise Cooper, a markets analyst at BGC Partners.
Monti is a former EU competition commission with a reputation for taking tough stands. He has no political party behind him, meaning he is at the mercy of lawmakers from Italy's infamously bickering parties to back him on painful doses of austerity.
Information from the Associated Press was used in this report.