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Why Italy may need a bailout, too

With high debt and falling stocks, Italy appears to be the next European economy on the brink. Investors and European officials are now sounding alarm bells.

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Mr. Trichet on Sunday told an economic gathering in France that Europe was the “epicenter” of a debt crisis that concerned the markets of all advanced economies around the world.

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“For Italy it is new data, internal political tensions, and uncertainty,” says Luigi Speranza, a London based economist with French bank BNP Paribas. “For Spain, it is Italy and concern over the banking sector, and uncertainty. But it’s not really about Spain or Italy anymore. It’s about the entire eurozone. It’s quite hard to disentangle it anymore.”

The meetings on Greece remained inconclusive. "We discussed the issues related to the implementation of the decision of the European Council on a new program for Greece and we also exchanged views on recent developments in the euro area," Mr. Van Rompuy said Monday.

Italy’s June 9 stock fall is also seen as sparked by rumors of a growing split between Italian Prime Minister Silvio Berlusconi and his Finance Minister Giulio Tremonti, over the size and specifics of planned austerity cuts. Mr. Berlusconi wants less stringent cuts; but markets in Europe have recently relied more on the assurances of Mr. Tremonti.

Italy’s $2.5 trillion deficit is twice as large as that of Greece, Portugal, and Ireland combined, and rising debt insurance has caused deep worries among investors about the ability of Italy to finance its debt.

Italy has the third largest bond market in the world after the US and Japan. Its sovereign debt is 25 percent of eurozone debt, and its debt-to-GDP ratio is second only to Greece. Italian banks reportedly hold as much as 32 percent of its debt.

Until Italy this week, the greatest shudder in Europe was the possibility of a Spanish crisis, following the bailout of neighboring Portugal.

Some Italian banking officials have said the focus on Italy will diminish once a deal on Greece is secured.

"There has been a speculative attack on Italy in the past few days which is not justified by the fundamentals of either the country or the banks," Antonio Vigni, managing director of Banca Monte Paschi told Reuters news agency.

Andrés Cala contributed reporting from Madrid

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