Wednesday morning, the Italian 10-year note jumped to a record-breaking 7.04 percent, its highest since it joined the eurozone.

According to the New York Times, Italian credit default swap rates have more than tripled in cost since the summer. As of Monday, the annual cost of ensuring a $10 million five-year Italian debt bond was already a cool $511,000.

The PowerShares DB Italian Treasury Bond Futures ETN (NYSEArca: ITLY) has fallen 6.16 percent since Monday. If you held the PowerShares DB 3X Italian Treasury Bond Futures ETN (NYSEArca: ITLT), you’ve lost a whopping 18.09 percent this week.

By now, the 7 percent level on a 10-year bond has become foreboding in the eurozone, simply because interest rates on such loans become too costly for a cash-strapped government to properly repay. Greece, Ireland and Portugal breached that threshold early in Europe’s sovereign debt crisis, and one after another sought bailouts from the International Monetary Fund and others. Will Italy follow in their footsteps?

Past As Prologue?

Take Greece. As yields on Greek 10-year notes rose, the MSCI Greece Index tanked. You can see that sovereign debt yields started rising right around April 2010, or the time of the initial bailout.

It looks like, when the spread between the bond yield and total return becomes too wide—investor confidence is shot.

Source: Bloomberg

In late 2010, when talk of default began swirling in Portugal, the spreads between bond yields and total returns on 10-year Portuguese debt behaved much as they had in Greece.

Source: Bloomberg

The question now is whether this will also happen in Italy. For now, its spreads have not moved to the same ominous levels as they have in Greece and Portugal.

Source: Bloomberg

Maybe it is because Italy is wealthier.

Also, while government debt and spending have been high, both have remained relatively stable since Italy joined the eurozone in 1999.

So, where’s the fire?

To begin, total national debt as a proportion of GDP is massive, and second only to Greece in the eurozone. That says something, especially considering the fact that Italy is the fourth-largest economy in Europe and the eight-largest in the world.

Moreover, Italy’s economic growth has been sluggish in the past decade, averaging .28 percent per annum. In contrast, France has grown more than four times as much, at an annual average of 1.14 percent. (France is an apt comparison in part because both have populations of approximately 60 million.)

It’s unlikely that Italy’s growth will explode overnight. According to the Bank for International Settlements, the average company in Italy has less liquidity than its international counterparts. Furthermore, the Italian economy is plagued by a low birth rate and high life expectancy—a combination that cripples future growth, caps labor supply and fuels sky-high social welfare spending.

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