ITALY'S public debt, the world's third-biggest, equivalent to over 104% of GDP, is not so much the elephant in the living room as the ogre in the attic. The fear has long been that it could escape and wreak havoc, not only in Italy but also across the entire euro area. On December 3rd came what some took to be an ominous rattling of the attic door.

It took the form of an answer by Silvio Berlusconi's welfare minister, Maurizio Sacconi, to suggestions that he was at odds with the finance minister, Giulio Tremonti, over how much to spend on stimulus measures. Denying that there was any conflict, he said “I too am constrained by the public debt. And I too am worried by the risk of default.” Seemingly unaware of the possible effect of his words, he added: “There is something worse than recession, and that's state bankruptcy: an improbable, but nevertheless possible, hypothesis.” If the Italian Treasury were unable to find buyers for Italian sovereign bonds, said Mr Sacconi, Italy could go the way of Argentina, which defaulted in 2001.

The sovereign-bond market has certainly become more testing for sellers of debt. Numerous countries, many with far better credit ratings than Italy, need to raise cash. But if the yield on Italy's bonds goes up, the government may end up paying more in interest, and that increases the risk of the budget deficit getting out of hand. Were this to happen, it would further erode investors' confidence, prompting them to demand still higher yields.

Amid the outcry that followed Mr Sacconi's remarks, Mr Tremonti denied that there was any danger of default. But on the same day he himself confirmed that the risks had grown. He told a parliamentary committee that the “sole constraint” on government spending was no longer the European Union's Maastricht rules that cap budget deficits, but the limits imposed by the markets. Indeed, fears have been expressed that the start of what financiers call “adverse debt dynamics” can already be discerned in a sharp widening of the spread (the difference in yields) between the ten-year German bund and its Italian equivalent. On December 5th this peaked at 144 basis points—up from a low of 38 basis points at the end of May (see chart).

Yet Brian Coulton of Fitch, a rating agency, points out that this reflects falling German yields (as investors seek ultra-safe havens) rather than rising Italian ones. “The current yield on Italy's ten-year bonds is the same as it was at the end of 2007,” he notes. Since the launch of the euro, moreover, Italy's debt managers have managed to extend the average term of its borrowing to almost seven years, locking in then-prevailing interest rates and ensuring that less of the outstanding debt is subject to abrupt rate increases.

Thanks in part to retrenchment under the previous centre-left government, Italy's public finances are no longer in the parlous state they were in a few years ago. In the spring Mr Tremonti rammed through parliament a three-year spending plan that included deep cuts. That leaves two questions. One is whether he can make his cuts stick. The other is what will happen on the revenue side of the ledger. In a recession tax revenues can be expected to fall. But how much?

In part, the answer will depend on the sensitivity of the public accounts to changes in growth. Tax revenues soared under the centre-left. But as Mr Coulton points out, it is not clear how much of this increase was structural (the product of enduring improvements in tax collection) and how much cyclical (the result of a temporary upswing in the economy).

The other variable is the depth of the recession. Most forecasters believe that it will be shallower in Italy than in Britain (though deeper than in France or Germany). But Mr Berlusconi's anti-recession measures have been distinctly modest (involving extra net spending of only some €6 billion). And the reason that he withdrew his pledges of more aid was that Mr Tremonti reminded him of the limitations imposed by Italy's €1,575 billion of debt. The ogre is still there, even if for the time being it is safely chained.