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Heavily indebted countries depend mightily on fresh sources of cheap loans to tap as old debts come due. A sudden rise in rates does more than reflect a drop in creditworthiness; it helps cause it.
For Italy, the difference between summer's sub-5% bond yields and today's 7%-plus one could determine whether it goes the way of Greece. The two countries aren't nearly alike in terms of potential for broader damage. "There's not enough backstop in the world to protect savers if Italy defaults," says John Canally, an economic strategist with LPL Financial in Boston. And an Italian default would drag down bigger economies like those of France, Germany and the U.K.
Much will be decided in the next two weeks. Europe's central bank is buying Italian bonds to try to contain yields. At the same time, says Mr. Canally, "a lot of speculators are trying to do what Soros did to the pound in 1992." In that episode, hedge fund manager George Soros made a massive bet against the British pound, profiting from its eventual fall, and, some believe, contributing to it.
