The eurozone debt crisis is taking a new and more dangerous course, with signs that contagion is spreading to Italy, Europe’s third biggest economy.
Fears about Italy saw a sell off in many markets on Friday night, our time, and then across the globe yesterday and last night, with big losses in Australia, Europe and the US where the market lost 1.2% or over 150 points for the Dow.
With Australian now gripped by the carbon tax debate, offshore events are out of sight, but if things continue to worsen, they could sweep over us, forcing the Reserve Bank and the Government to hunker down.
The gathering pressures in China, the US and Europe could prove to be once again fatal to global economic growth and financial stability.
The potential correlation between Italy, Europe, China and the US could be explosive if not handled well.
Italy is the big worry. Sure it’s has been well for a while and its dysfunctional leadership is a joke, but its debt and domestic finances are in better shape than the UK, the bailouts of Greece, Portugal and Ireland, and stronger than Spain.
But Italy is a top 10 global economy, the third largest in the eurozone and Europe; it is a member of the G7, the G-20 and is at the heart of the EU.
It has the world’s third biggest government bond market after the US and Japan.
A financial crunch would damage a lot more economies than just Italy’s
And yet for no real reason, Italian bond yields rose all last week, hitting nine-year highs on Friday, while the country’s stock market fell sharply as bank shares plunged to a point where the country’s stockmarket regulator was forced to introduce curbs on short selling late Sunday to try and halt the destabilising price falls.
Italian stockmarket regulators tightened their rules over short selling on Sunday night ahead of trading in Milan overnight in an attempt to avoid a repeat of Friday’s sharp sell off, which is widely thought to be partly due to short selling of debt and shares by hedge funds.
The European Council President Herman Van Rompuy called an emergency meeting overnight Monday to discuss the worsening euro problems, especially Italy.
That met with European Central Bank President Jean-Claude Trichet attending the meeting along with Jean-Claude Juncker, chairman of the European Union’s finance ministers. European Commission President Jose Manuel Borroso.
The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis.
The meeting also discussed finding a way to allow Greece to selectively default on some of its huge debts, a move that will further worry markets.
Yields on 10 year Italian bonds hit 5.28% on Friday, a nine year high (and notice, that’s higher than during the GFC), while the difference between the Italian 10-year government bond yield over benchmark German bonds hit an all time high of 2.45%
They jumped further overnight Monday, rising from around 5.28% to 5.5%. Spanish debt also rose to new highs.
In fact Italian bonds yields are approaching a point where the added expense of borrowing might start prove to be crippling. (that’s 7% or higher).
Italian bank shares plunged by more than 10% in some cases last week, the second big fall in three weeks: the Italian stockmarket dropped by more than 7%, the biggest fall in 14 months, topping the previous biggest fall two Friday’s earlier.
They fell again Monday with shares of Intesa Sanpaolo down 7.7%, (after dropping 14% last week).
UniCredit SpA shares were down 6.3% after falling heavily last week.
Bank shares in other European markets fell sharply, especially in Belgium.
The Italian market fell 4% after dropping 7% last week.
Markets across Europe also fell sharply.
There are fears Italian and other European banks will be exposed by the results of the latest bank stress tests out on Friday night, our time, but the attack on the banks and on the country’s sovereign debt was more than just idle speculation.
It seems to have been going on for the best part of a month or more, forcing bond yields higher and the market price of bank and insurer shares lower in Milan.
But there’s more happening in Italy than just the fears about the country’s banks and big insurers.
The country’s leadership and political problems are damaging market confidence: no wonder a couple of rating agencies have Italy on credit watch negative and might be tempted to harden up their warnings if this instability spreads.
If Italy becomes the next country forced to deleverage and cut its spending and debt, then watch the euro and global financial markets take a big hit.
It’s no certainty, but markets have moved right past stuttering Spain to focus on Italy in the past month as Greece hogged the headlines.
Not helping confidence has been the gathering crisis in the Italian Government that saw Prime Minister Silvio Berlusconi try to push a regulation through into a big austerity package that would have benefited his media company to the tune of hundreds of millions of euros by delaying the possible payment of a damages claim against it.
The country’s finance minister, Giulio Tremonti, a former close ally of Berlusconi, has become embroiled in yet another corruption scandal, generating fears in the markets that he will be forced to resign and Berlusconi and his political allies will force through tax cuts that will
