First up, let's start with a brief background of Mario Monti's time as Italy's Prime Minister.
Back in November 2011, Monti was asked by Italian President Giorgio Napolitano to head the new technocratic government, after long-time Prime Minister Silvio Berlusconi resigned.
Since the beginning of his term, Monti has pushed for tougher austerity measures via substantial tax increases. He also overhauled the Italian government's pension system to help reduce government spending.
This had many Italians singing praises of the good work that Monti was doing.
However, if there's anything we learned from the Godfather trilogy, it's that Italians are hard people to please! Confidence in Monti's government is waning, as the public still see many unfinished projects on the pipeline as well as deteriorating economic conditions.
Unemployment continues to rise, as it hit 10.2% this past May, marking the eighth consecutive month that unemployment has risen. Meanwhile, Italy is now back in a technical recession, posting growth figures of -0.7% and -0.8% over the past two quarters.
Worse, Monti's plan to increase value-added tax by 1% has backfired. Instead of raising the total amount of taxes collected, tax receipts have dropped to their lowest level since 2006, as the increased VAT has caused consumers to cut back on their spending!
Polls show that support for Monti's government has dropped from 63% in April to 50% last week. Furthermore, confidence in Monti himself is in a free fall, as it now stands at just 34%, after printing as high as 71% back in November 2011 when Monti was sworn in as Prime Minister.
Unfortunately, the weak economic data and the loss of confidence in Monti is also taking its toll on Italy's borrowing costs. The country's 10-year bond yields hit 6.26% yesterday, a new high in 2012. The figure is not only uncomfortably close to the 7% mark where other euro zone economies had asked for bailouts, but also signals that the government could have an even harder time coughing up money to pay its debts.
Right now Italy's government debt is at 1.9 trillion EUR or 120% of its GDP. Keep in mind that the Italian government is also due to roll over at least half of its 450 billion EUR worth of bonds this year. At this rate, it might be more profitable for the government to sell fettuccine and antipasti instead of government bonds! But that's just me.
With Italy's debt and bond yield woes under the spotlight, investors are worrying that the Italian economy might be the next in line to need a bailout after Spain.
If investors continue to lose confidence in Monti's ability to implement his plans and keep government budgets in check, then we might hear more speculations of an Italian bailout. This will cause Italian bond yields to soar even higher and this may prove to be the final straw for Monti's government.