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Jun 11, 2012 6:01 AM GMT+0800 The 100 billion-euro ($125 billion) rescue for Spain s banks movesItaly to the frontline of Europe s debt crisis, putting pressureon Mario Monti s unelected government to avoid succumbing to amarket rout. The scrutiny of Italy is high and certainly will not dissipateafter the deal with Spain, Nicola Marinelli, who oversees $153million at Glendevon King Asset Management in London, said in aninterview. This bailout does not mean that Italy will be underattack, but it means that investors will pay attention to every bitof information before deciding to buy or to sell Italian bonds. Italy has more than 2 trillion euros of debt, more as a share ofits economy than any advanced economy after Greece and Japan. TheTreasury has to sell more than 35 billion of bonds and bills permonth -- more than the annual GDP of each of the three smallesteuro members, Cyprus, Estonia and Malta. Spanish Economy Minister Luis de Guindos said on June 9 that hewould request as much as 100 billion euros in emergency loans fromthe euro area to shore up a banking system hobbled by more than 180billion euros of bad assets. Mounting concern about the state ofSpain s banks and public finances drove the country s borrowingcosts to near euro-era records last month, dragging up Italianrates in the process. The problem for Italy is that where Spain goes, there s alwaysthe perception that Italy could follow, Nicholas Spiro, managingdirector at Spiro Sovereign Strategy in London said in aninterview. There is insufficient differentiation within thefinancial markets. It is clear as the light of day and has beenthat Spain s fundamentals are a lot direr than Italy s. Thathasn t stopped Italy suffering from Spanish contagion. Primary Surplus Italy is on track to bring its budget deficit within the EuropeanUnion limit of 3 percent of GDP this year and the country isalready running a surplus before interest payments, meaning itsdebt will soon peak at about 120 percent of GDP. The jobless rateis less than half of Spain s 24 percent, and Italy didn t suffera real estate bust, leaving its banks healthy by southern Europeanstandards. The budget deficit at 3.9 percent of GDP last year, isless than half that of Spain. To be sure, a total debt more than twice Spain s gives investorspause, especially in a country where economic growth has lagged theEU average for more than a decade. The euro region s third-biggesteconomy, Italy is set to contract 1.7 percent this year, more thanthe 1.6 percent in Spain, the Organization for Economic Cooperationand Development estimates. Bond Spreads Italy s debt load had traditionally led the country to beperceived as a bigger credit risk than Spain. At the start of thisyear, Italy s 10-year bond yielded 202 basis points more than thatof Spain. As the extent of Spain s banking woes became moreapparent and the country was forced to raise its deficit target,that spread reversed and now Spain s 10-year yields 44 points morethan Italy s. That outperformance may offer little reassurance to investors asItaly s 10-year yields still crept up to more than 6 percent lastmonth, widening the gap with German bunds, the European benchmark,to 547 basis points on June 1. Debt agency head Maria Cannata last week said that fewer foreigninvestors were turning up at Italian auctions in recent months andthat the country could still finance at yields as high as 8percent. Foreign Exodus The exodus of foreign buyers has left the Treasury more dependenton Italian banks, which in turn have been among the biggestborrowers in the European Central Bank s three-year lendingoperations. Italy returns to markets before Spain does, selling asmuch 6.5 billion euros of treasury bills on June 13, followed by abond auction the next day. If Italy has a problem with accessing the markets becauseinvestors lose confidence in the Italian ability to do the rightthing, the ECB will be drawn into the fire, said Thomas Mayer, aneconomic adviser to Deutsche Bank AG, in a telephone interview. That could pose a potentially lethal threat to European monetaryunion. Given the size of Italy s debt, only the ECB has the firepower torescue the country and yet deploying that ammunition -- throughbuying back bonds or making more long-term loans -- may proveunacceptable to Germany and its allies in northern Europe, Mayersaid. The ECB will probably have to restart buying bonds but there willbe a lot of sellers into that of people who are worried that Spainis the next Greece and Italy the next Spain, said Daniel Gros,director of the Center for European Policy Studies in Brussels. Monti s Mission There may be little Italy can do on its own to protect itself.Monti, who came to power in November when Italy s 10- year yieldexceeded 7 percent, has implemented 20 billion euros of austeritymeasures, overhauled the pensions system and revamped the county slabor markets and service industries. Monti s efforts helped shave more than 200 basis points off the10-year yield by February, before the turmoil in Greece andSpain s banking woes began driving up rates. Now with finalpassage of some of his reforms bogging down in parliament, Monti ispressing European allies to pivot from austerity to pro- growthpolicies. Mr. Monti seems to be infinitely more concerned about what sgoing on abroad than what s going on in parliament, Spiro said. Understandably so, because Italy has not been a master of its ownfate for a long time. He s perfectly aware that in order to fixItaly, they have to fix the euro zone. 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