Global markets are likely to be on edge this week, as the roiling eurozone debt crisis threatens to spread to Italy, the region’s third largest economy.

According to a Reuters report, European Council president Herman Van Rompuy has called an emergency meeting of top eurozone officials later today to discuss the deteriorating situation in Italy, as well as Greece’s latest bailout. The head of the European Central Bank, Jean-Claude Trichet, will attend the meeting, along with Jean-Claude Juncker who heads up the group of eurozone finance ministers.

Although the Reuters report quoted a spokesman for Van Rompuy as saying Italy would not be on the agenda, it said that two official sources had confirmed that the situation in Italy would be discussed.

The emergency meeting comes after investors dumped Italian bonds on Friday, pushing yields to nine-year highs. Yields on Italian 10-year bonds moved up sharply last week, climbing half a percentage point to finish at 5.27%. Investors have also dumped Italian bank shares because of concerns over upcoming eurozone bank stress tests. The share price of Italy’s largest bank, Unicredit Spa, dropped 7.9% on Friday, while the overall market sank 3.5%.

Bond markets are becoming increasingly concerned about Italy’s debt burden, which is equivalent to 120% of the country’s GDP, and the country’s anaemic economic growth. The country has close to €900 billion ($US1.3 trillion) of government debt maturing over the next five years, and investors are concerned that the latest rise in the country’s borrowing costs will cause financial strains.

Investors were also unnerved after Italian prime minister Silvio Berlusconi publicly undermined his finance minister, Giulio Tremonti, who has pushed for deep spending cuts as part of the country’s proposed austerity package.

“[Tremonti] thinks he’s a genius and that everyone else is stupid,” Berlusconi said in an interview with the centre-left newspaper La Repubblica, which was published on Friday. He added that Tremonti was “worried about the markets … But I always remind him that in politics the result is made up of consensus and votes.”

Overnight, however, Italian politicians and government officials tried to paper over divisions. “From tomorrow, we have the job of showing we are united and blocking the effort of speculators,” Paolo Bonaiuti, a senior aide to Berlusconi, said.

“In the coming months we have €120 billion-€130 billion of bond issues to deal with, so we need cohesion and united intent; it’ll take effort to show that the markets are overdoing it.”

According to Italy’s daily business newspaper Il Sole 24 Ore,Italy’s securities market regulator, Consob, moved overnight to protect the Italian banks from speculative attacks by announcing new rules that will force short-sellers to disclose their positions.

Meanwhile, there are concerns that the eurozone’s existing rescue mechanism is far too small to bail out Italy, should its borrowing costs continue to escalate sharply. The German daily Die Welt reports that some ECB officials want to see a large increase in the eurozone’s rescue fund.

Die Welt quoted an unnamed European central banker as saying the existing bailout mechanism is not sufficient to build “a credible protection wall” around Italy, because it had not been designed to do that. The Die Welt report also noted that last month, the head of the Dutch central bank, Nout Wellink, had called for the size of the eurozone’s emergency rescue package to be doubled.

*This first appeared on Business Spectator.