by Calculated Risk on 7/08/2011 06:04:00 PM

A top European analyst put out a research note last night calling Italy "the elephant in the room". Those fears sent the Italian 2 year yield to 3.5% - nothing compared to Greece, Portugal and Ireland, but a significant increase. The 10 year yield increased to 5.3%.

From the LA Times: Italy and Spain rocked by fears of spreading debt 'contagion'

The “contagion” that has forced Greece, Ireland and Portugal to seek bailouts from the rest of Europe now is threatening Italy, as investors demand ever-higher interest rates on Italian government bonds.

The yield on two-year Italian bonds surged to 3.51% on Friday, the fifth straight increase and up from 3.32% on Thursday. On Monday the yield was 3.04%.

Likewise, Spanish two-year government bond yields jumped to 3.77% on Friday from 3.66% on Thursday and 3.35% on Monday.

The next round of European bank stress tests will be released next Friday, from Dow Jones: EU Fears For Stress Test Credibility As Deadline Nears

Under the terms of the tests, banks that fail to prove that they can preserve a certain capital ratio in the event of a severe downturn are supposed to fill the gap, at the latest, within six months of the results being published. That date has now been confirmed as next Friday, July 15.

In the event that those ailing the test also find themselves unable to raise the required capital, national governments are supposed to step in with "backstop mechanisms" to recapitalize or restructure the banks in question.

There are fears about some of the large Italian banks, however from the Dow Jones article:

Mario Draghi, the incoming president of the European Central Bank, said Friday that he is sure that the five Italian banks taking the test will pass "with [a] rather meaningful, significant margin."

I'm sure people will be asking if the stress tests were credible.

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year