Italy on the brink as yields soar past point of no return

The eurozone debt crisis has again conformed to pattern this morning; just as one fire abates, temporarily at least – with news of the formation of a government of national unity in Greece – another lights up. Lamentably, this one – Italy – may be too big to douse.

The yield on ten year Italian debt rose to 6.59pc this morning, widening the spread on German bunds to an unprecedented 4.81pc. These are the sort of levels at which Greece, Ireland and Portugal began to find themselves shut out of markets.

Yet this time, there appears nothing there to offer support. The "enlarged" European Financial Stability Facility is not yet up and running. Few seem prepared to offer it the "leverage" required for the mooted €1 trillion of fire power. The European Central Bank under its new president, Mario Draghi, has said it's not its job to act as "lender of last resort" to governments. And the new funds that would allow the International Monetary Fund to step into the breach have not yet been agreed.

Internationally, moreover, there is growing resentment at being called apon to support further EFSF and IMF bailouts. Christine Lagarde, managing director of the IMF, could soon have a full scale rebellion on her hands. From China to Brazil, the now openly spoken mantra is that Europe should sort out its own problems. By what right does one of the world's richest regions call on poorer, and sometimes even more indebted, nations to lend support?

As my colleague, Ambrose Evans-Pritchard, points out in this morning's Daily Telegraph, the problem with Italy is not really one of contagion from the rest of the eurozone periphery. It's much more to do with the fact that Italy is sliding into deep recession, further undermining already stressed debt dynamics.

There's a vicious circle at work, whereby more austerity equals less demand, equals negative growth, equals an even bigger debt burden. Unlike Britain, there is no monetary policy and devaluation to counter the economically debilitating effect of the fiscal squeeze. With growing lack of competitiveness, Italy is in the wrong currency.

At his first press conference last week as ECB president, Mr Draghi said that further bond purchases would be "temporary", "limited" and "justified on the basis of restoring the functioning of meonetary policy transmission channels". At Jefferies International, chief economist David Owen takes the view that whatever Mr Draghi said last week, in practice he'll be forced to change tack and make the promise of "unlimited" buying explicit. But even if he did, would it really do the trick?

Mr Draghi would have preferred to exhaust conventional measures first, in particular cutting interest rates all the way down to 0.5pc, but conditions in the Italian bond market are deteriorating with such speed that he may not be allowed that luxury. When a fiscal crisis developes, it tends to happen very fast, with the rapid ebbing away of what remains of market confidence. That's the place Italy now finds itself in.

Eurozone policymakers think they are already moving at a speed which is only barely compatible with continued democratic support. Yet they are going to have to move even more swiftly towards the introduction of eurobonds and a centralised eurozone treasury function if they are to save the project. Germany and other rich, creditor eurozone nations are going to have to make up their minds; they wanted the euro, but are they prepared to do what it takes to sustain it?