In Italy, the yield on 10-year government bonds exceeded 7% at the end of 2011, compared with under 2% in Germany. The spread between Italian and German bonds soared again to levels similar to those in July 2012. Protection against a hypothetical default by the Italian government was trading in mid-2012 at three to four times higher than it was in mid-2011.
The level of the public debt of a country influences the state of health of its banks through two main channels. On the one hand, the budgetary position is seen as the ultimate guarantor of the solvency of a bank: if it fails the state budget is seen as the guarantor of last resort.