07:01 PM GMT from CNN websiteShareComments (13 comments)PermalinkItaly flirts with the euro crisis danger zonePosted by:CNN Digital Business Producer, Irene ChappleLondon (CNN) – Greece’s future – and that of Europe – is in disarray after the decision by Prime Minister George Papandreou to call a referendum on its bailout. Now Italy’s soaring funding costs are injecting fresh anxiety into the crisis.Italy is being crushed by investors, who are now insisting on yields of up to 6.4% to invest in its 10-year bonds. Markets regard 7% as a benchmark which, if breached, makes it extremely difficult for countries to fund themselves.So these levels are now sending red alerts: Italy is flirting with the danger zone. This, over and above the sheer panic and difficulties which would ensue should Greece decamp to the drachma, is a very real problem.Italy makes up 17% of the eurozone's economy; Greece, Ireland and Portugal combined account for only 6%. Suggestions it may need financial aid would send the markets into a tailspin. It could also suck Spain, the eurozone’s next largest economy, into the bailout vortex.Last week such fears faded, as European markets cheered the grand bailout plan that would surely save Europe. But Papandreou’s unexpected referendum move Monday blindsided the politicians and the markets. Uncertainty - and the extreme volatility it feeds - is back, and overshadowing this week’s G-20 meeting in Cannes.Investors are “almost broken,” one desk analyst told CNN. “What we saw yesterday - you can’t make this stuff up. People were blown away. People’s nerves and patience are shot to pieces.” Investors are far less likely to dismiss what in the past may have seemed unthinkable, he added.Italian Prime Minister Silvio Berlusconi is under pressure from Germany and France to come up with plans to curb the country’s €1.9 trillion in debt, equal to about 120% of its economic output, and boost growth. Its economy has been stagnant for a decade.Italy has been downgraded by all three major ratings agencies in the last two months, and one austerity measure - to raise the retirement age two years to 67 - prompted the suspension of parliament last week after a brawl broke out between lawmakers.David Buik, partner at BGC partners, says the soaring bond yields are due, in large part, to Berlusconi's struggle to implement austerity measures. “The Italian coalition is very fragile and Berlusconi is holding on by his fingernails,” Buik says. “The Italian situation has been exacerbated by Papandreou's astonishingly ill-timed, duplicitous and deranged behavior for which he should be universally vilified.”The magic 7%, however, does not inevitably lead to a bailout. As Buik points out, Greece, Portugal and Ireland bond yields hit double digits before they were bailed.While Italy is facing issues including a cyclical slowdown, a lack of competitiveness and problems with its electoral system, “strong political action” could counter the headwinds, Societe Generale economists noted last week.So as the weak eurozone economies stumble under Greece’s shadow, pressure will intensify on the European Central Bank, which has been a vital player in the crisis.Its controversial role as buyer of eurozone sovereign bonds, a strategy designed to keep funding costs down, could be ratcheted up.After eight years under Frenchman Jean-Claude Trichet, the bank’s role is increasingly under the spotlight. Italy’s Mario Draghi had his first day in the job Tuesday: With Greece apparently stumbling near the abyss, easing the pain for Italy could be high on his to-do list.