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Tim Wallace
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THE CLOCK is ticking for the European Central Bank (ECB) and international community to step in to save Italy, economists warned as the country’s borrowing costs shot through the roof yesterday.

Stocks across the world fell as the crisis escalated, with the Dow plummeting 3.2 per cent, the DAX falling 2.21 per cent. and VIX, a measure of volatility in the US, up 31.6 per cent.

Yields on 10-year Italian bonds spiked through the seven per cent mark, peaking at 7.48 per cent. Once yields on Portuguese and Irish debt reached such levels those countries became locked out of markets and had to seek bailouts.

Much of the alarm was driven by clearing house LCH.Clearnet SA’s decision to raise the margin call paid by buyers of Italian debt by five percentage points to 11.65 per cent, reflecting increased risk of holding the bonds. With the ECB suspected to have intervened later in the day, yields fell back to 7.21 per cent.

Meanwhile, Greek politicians failed to reach a deal on who will be the country’s next Prime Minister.

French and German leaders are believed to be discussing the potential for a more integrated core Eurozone, while reports in Germany suggest that Angela Merkel’s party is investigating ways in which countries could leave the single currency.

Commenting on more immediate responses, Investec’s Philip Shaw said: “We need a global solution, which means countries which can should increase contributions to the International Monetary Fund.

“That may be politically unpalatable – China will demand increased voting rights, which Europe and the US will not like – but domestic political objections tend to fall away when economic Armageddon is just around the corner.”

Other economists pointed to potential solutions within the EU.

“The next really big Italian debt maturity comes in February and the politicians know the consequences of a disorderly default if they do not take action by then,” said Capital Economics’ Ben May.

“The ECB does not want to finance governments, saying that is not its job – but if nobody else will, the ECB may have to.”

Credit default swaps on five-year Italian debt shot up 9.37 per cent yesterday on fears the government will not be able to pay its debts.