Add Italy to your list of Global Debt Bomb worries–maybe it should be at the top of the list
The last thing global financial markets need right now is another Euro Crisis. But that could be what Italy is about to put in motion
The last thing global financial markets need right now is another Euro Crisis. But that could be what Italy is about to put in motion
So far, global financial markets are willing to overlook deepening debt troubles in Greece and Portugal. After all, these are countries on the “periphery” of the EuroZone and not in the “real” EuroZone. Today’s very gloomy report from the Bank of Italy lowering the projected growth rate for the Italian economy argues, however, that the EuroZone core is in trouble too.
While the yield on the U.S. 10-year Treasury has moved up to 2.49% from 1.93% a month ago, the yield on the Spanish 10-yer government bond has climbed 0.31 percentage points this week to 4.9%. The yield on the Italian 10-year bond has climbed to 4.6%.
That’s indeed a big move higher in a short time but it leaves bond yields for Spain and Italy a long way below the danger zone of 6% and above
Stock markets are down—and Italian bonds and the euro are in retreat—at polls today showing that Silvio Berlusconi’s coalition has narrowed the lead of front-runner Pier Luigi Bersani to within the margin of error.
What seems to have really rattled the markets today is political news from both Spain and Italy that threatens to produce weak governments that would not be able to continue the programs that have stabilized the European debt markets. In Spain the threat comes from a corruption scandal that has already led to calls for the resignation of Prime Minister Mariano Rajoy. In Italy it’s the continued surge of Silvio Berlusconi
Markets seem to have decided that the Italian elections don’t much matter—because Italy is headed into crisis no matter what. And that there’s no way that bumbling U.S. politicians will average a trip off the fiscal cliff. That means negative verbiage in December won’t hurt markets much. But it does leave them vulnerable to unanticipated consequences from that incompetence in 2013
After Mario Monti what? Monti’s decision to resign as Prime Minister of Italy after Parliament approves the new budget has thrown Italian politics and European financial markets into a dither. It now looks like Italy will hold new elections in February–with no clear leader likely to emerge
Today not only is bad news good news on the theory that bad economic news will push the world’s central banks to faster action. But also Wall Street is starting to believe its own press releases. Today, we’ve got market analysts saying that stocks should be going higher because earnings are coming in above expectations—even though Wall Street itself created those low expectations.
ECB President Draghi’s comments this morning reminded traders that the central bank meeting is just a week away and that the European Central Bank could take action that would put everybody who has made money in recent weeks betting against the euro, and Spanish and Italian bonds, and European stocks in danger of giving back all or most of their gains.
The plan to break the link between troubled banks and troubled sovereign debt that came out of the June 28-29 summit of European leaders looks badly frayed this morning. The meeting of European finance ministers that began today and that really gets up to speed tomorrow has turned into a fight over what was actually agreed at the June summit.