Since the sovereign debt crisis descended on Europe in spring 2010, the nightmare haunting the continent’s policymakers has been the prospect of the crisis reaching Italy. In recent weeks the odds of such an event happening have shortened dramatically. If Rome is to stave it off, urgent and decisive action is needed.

Having eased a little following Monday’s panic, yields on Italian bonds rose again on Thursday. Italy was forced to pay 4.93 per cent – the highest for three years, and a percentage point more than a month ago – to sell five-year paper. A simultaneous auction of 15-year debt was the most expensive on record.

The Italian state can cope for a time with the pain of expensive auctions. The maturity profile of its debt is favourable and the cost of higher yields would only become dangerous if sustained over a prolonged period. But any doubts about Italy’s debt sustainability could impair the ability of Italian banks to fund themselves. That could be felt much sooner. Once yields balloon, a loss of confidence can quickly become self- fulfilling. As the experience of Ireland shows, once a country loses the faith of the market, it is almost impossible to regain.