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What separates Italy from Greece? (The Ionian Sea)

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Italy's troubles mount Italy is sinking deeper by the day, and its bond yields spiking ever higher. So much so that its president was forced to pledge today that Prime Minister Silvio Berlusconi will indeed leave office soon. Honest, he will.

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Mr. Berlusconi may be planning to step down, but it's a promise that buoyed investors only for a short time. Global stock markets plunged today, and the yield on Italy's 10-year bond spiked to a crisis level well above 7 per cent at one point, raising troubling questions about the outlook for the latest country in the eye of the euro debt storm.

"Wednesday's surge in Italian government bond yields has catapulted the euro zone crisis into a dangerous new phase," warned John Higgins of Capital Economics.

"Precedents set by Greece and Ireland suggest the Rubicon may have been crossed," he said in a report today.

"If so, Italy's cost of borrowing could now climb much more sharply, effectively locking her out of the capital markets. Even though Italy runs a primary surplus, this outcome could still force her to turn to official creditors to roll over her debt. But while Italy is considered to be too big to fail, she may be too big to save unless there is a major change of attitude towards resolving the crisis. Things could be about to turn very ugly."

Is Italy the next Greece? Not yet. It's the fear at play, the speed at which these things are moving, and the pounding in the bond market. And there are pressures on the horizon.

"Berlusconi the billionaire may be on his way out but he's not taking any of the €1.6-trillion in debt (120 per cent of GDP) with him," said Stewart Hall, senior fixed income and currency strategist at RBC Dominion Securities in Toronto.

"With pretty much the entire Italian government curve trading through 7 per cent, Italian yields have now pushed into a murky area of the yield spectrum that is being associated with insolvency. Simply put, the yield curve is getting in the face of policy makers striving to cut program spending as a means of arresting the fiscal deficit just as the cost of rolling over the stock of debt is eroding those very savings."

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Italy's debt profile over the next two years is "troublesome," Mr. Hall noted. Next year, it needs to roll over almost €200-billion in bonds, followed by a further €150-billion in 2013. Tomorrow it faces something of a "litmus test" with €5-billion auction of one-year bills.

Concerns over Italy hammered financial markets, roiling stocks, currencies and commodities. There had been some brief optimism after Mr. Berlusconi, who lost his parliamentary majority yesterday, said he would step down when the country's austerity measures are passed.

Tokyo's Nikkei gained 1.2 per cent, and Hong Kong's Hang Seng 1.7 per cent, but stocks plunged across Europe. London's FTSE 100, Germany's DAX and the Paris CAC 40 were down in the 2-per-cent range and North American markets picked up the sentiment.

The S&P 500 and Toronto's S&P/TSX composite sank, by 3.7 per cent and 2.7 per cent, respectively. The euro fell sharply, as did the Canadian dollar as the U.S. greenback climbed.

"The worry now is that Italy's borrowing costs in the market will rise at a more alarming rate," said Mr. Higgins of Capital Economiics. "... Within a month of the 10-year yield in Greece hitting 7 per cent in April, 2010 (the yield had very fleetingly broken above this level in January of the same year), it had reached 12 per cent, prompting Greece's first bailout package. And within a month of the 10-year yield in Ireland hitting 7 per cent in November, 2010, it had risen above 9 per cent, triggering that country's bailout. Only the example of Portugal offers limited hope for Italy. There yields hit 7 per cent in November, 2010, but did not move decisively higher until the early spring of this year, eventually prompting a bailout in May."

Analysts are now talking about how much it would take to rescue Rome if needed, and where that money would come from, given the pressure already on Europe's bailout fund and the fact that Italy, the third-largest economy in the euro zone, is so much bigger.

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The European Central Bank is not likely to come to the table, and G20 leaders have denied further resources to the International Monetary Fund.

"So who would save Italy's bacon if push came to shove? Core euro zone economies are the obvious choice. But it remains to be seen whether they will put their money where their mouths are," Mr. Higgins said. "If they don't, a disorderly default by Italy and her eventual exit from EMU could be on the cards."

It's not just Italy, but the fact that there's still no new prime minister chosen in Greece. Is anyone surprised that that's a saga on its own? It's now going into yet another day. Like Mr. Berlusconi, George Papandreou saw fit to bow out, though politicians appear to be having extreme difficulty deciding what shape the next government will take.

(Best tweet of the day from @DavidJones of IG Index: "We must be close to that time again surely - European emergency-meeting o'clock.")

China inflation dips Even brighter economic news from China couldn't shake the European and North American markets out of their funk, though the latest data from Beijing suggest monetary authorities could ease policy as they make inroads in their fight against inflation.

China's annual inflation rate fell sharply to 5.5 per cent in October, down from 6.1 per cent a month earlier. That points to the possibility that the People's Bank of China could bring down the reserve ratio requirements of the country's banks and, possibly at some point, interest rates as well.

The lower inflation rate was driven largely by a slowing in food costs. Indeed, pork prices fell 1.8 per cent from September to October, and will probably continue to decline as the "pig population" increases, said Mark Williams and Qinwei Wang of Capital Economics in London.

"In sum, today's data should give policy makers more confidence that inflation is becoming a diminished threat to the economy," they said.

"With risks rising in the domestic real estate market and in the global economy, this should pave the way for policy shifting towards easing. The first sign of easing is likely to come in the form of lower interbank rates and a rebound in bank lending, followed by cuts in the required reserve ratios perhaps by early 2012. We think that benchmark rate cuts will be considered a last resort and are unlikely before the middle of next year."

Quebecor profit sinks Canada's Quebecor Inc. basically met what analysts had expected as it posted a sharp drop in third-quarter profit today.

The company's results show weak broadcasting and newspaper revenues, The Globe and Mail's Iain Marlow reports, but strong growth in subscribers among its telecommunications services.

The media company's profit slipped to $26.1-million or 41 cents a share from $83-million or $1.29 a year earlier. Revenue climbed to $1-billion from $969.9-billion.

"As we anticipated, the company reported strong growth from wireless," said Maher Yaghi of Desjardins.

"The newspaper business continues to feel the pressure of incremental costs from new launches that have yet to start contributing to profitability," the analyst said in a research note.

"We continue to forecast acceleration in profitability growth beginning in [the fourth quarter]before hitting full stride in 2012. As heavy spending on wireless comes to an end, free cash flow in 2012 should also increase significantly. We continue to believe that attractive valuation and improving cash flow and profitability metrics in 2012 should offer investors solid returns."

GM profit dips General Motors Co. sank today after it posted a drop in third-quarter profit today.

GM earned $1.7-billion (U.S.) or $1.03 a share in the quarter, down from $2-billion or $1.20 a year earlier.

"GM delivered a solid quarter thanks to our leadership positions in North America and China, where we have grown both sales and market share this year," said chief executive officer Dan Akerson. "But solid isn't good enough, even in a tough global economy."

GM's North American business, overhauled during its fling with Chapter 11 bankruptcy protection, are doing well, though elsewhere in global markets it is being hit.

Rona takes dim view Canada's Rona Inc. is taking a dim view of the economy as it finds its same-store sales pressured, though profits up.

The home improvement retailer today posted a 5-per-cent drop in same-store sales, a key measure in the industry, in the third quarter, though profit increased to $50.1-million or 36 cents a share, diluted, from $48-million or 36 cents a year earlier. Overall revenue rose 2.1 per cent to $1.35-billion.

The retailer's outlook is glum, and the climate "poses a major challenge," said chief executive officer Robert Dutton.

"Given the fragile nature of Canadian consumer confidence and their cautious approach to major renovation projects, we expect to see continued downward pressure on same-store sales as a whole over the next few quarters, particularly in major urban centres where growth in supply has exceeded demand, leading to sharper competition," Mr. Dutton said in a statement.

"In this situation, we will continue to implement sales development and efficiency improvement measures, which have already paid off."

Grease in fashion Not long ago, the theft of copper was all the rage because of high prices. Now, greasy spoon restaurants are a new target.

NPR in the United States has taken a fascinating look at a new phenomenon, the theft of used restaurant grease that is sold in the biofuels market.

NPR blogger Nancy Shute reports on how restaurants and recyclers are now putting barrels of so-called yellow grease under lock and key because, as the National Renderers Association told her, it has become "the new copper."

It's known as inedible kitchen grease, or IKG, which was once deemed waste and used in animal feed, though now is "an elixir in the booming green economy," according to the California Department of Food and Agriculture.

"The grease's value as a biofuel is being increasingly recognized," the agency said last month. "IKG is now coveted, which makes it a target for theft."

A pound of the stuff is now going for about 40 cents, or five times the value of 10 years ago, according to NPR. After being processed, it can be sold for fuel.

Indeed, the CDFA has teamed up with authorities in a "high-theft" area to stop vehicles carrying IKG to ensure they're within the law. It's working well, so the agency is going to team up with others, as well..

"CDFA has responsibility for regulating IKG transport in California and is concerned that increases in theft is costing legitimate industry millions of dollars in lost revenue every year," it said.

Business ticker

In Economy Lab The promise of "more jobs" for resource processing packs a considerable punch in politics, Stephen Gordon writes. But the next time you hear it, ask yourself how devoting more productive resources to making things for foreign consumption is going to make us better off.

In International Business An investor protection treaty with China won't be enough to help Canadian mining companies struggling to advance their business there beyond exploration rights, the federal minister of natural resources warns. Carolynne Wheeler reports from Beijing.

In Globe Careers You've taken the vacation. You've come back. You have 5,000 e-mails in your inbox. You need to take steps to ease back into work without losing all the benefits of taking time off in the first place.

In Personal Finance Let's stop talking about it and start teaching financial literacy at elementary school.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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