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Italy Struggles On, For Now

By   /   July 13, 2012  /   No Comments

Moody’s recent downgrade of Italy’s credit rating, to just two levels above the dreaded ‘junk’ status, has put the jitters back into Italy’s bond market.

Economists are divided as to what bond-yields are unsustainable in the long term, but most put the level at around 6-7% for 10 year paper. Italy’s 10 year bond yields climbed 13 basis points to 6.04% on the news. Consequently, there are still genuine fears among investors over the long term viability of Italy’s enormous public debt levels.

The Colosseum in RomeNot only is Italy Europe’s largest bond market, but its public debt is nearing the €2 trillion mark.

The latest bond auction, which will add another €5.25 billion to these debts, is also evidence, bizarrely, of the progress being made on the Eurozone debt crisis. Spain’s financial bailout remains a strong boost to markets, but as this reuters article points out, the bond markets remain very volatile, and sentiment flaky.

Nevertheless, it should be noted that Italy’s one year debt is now one percentage point lower than it was just one month ago.

Italy’s main concern going forward is the presence, or rather the absence, of its technocratic prime minister, Mario Monti. Mr. Monti has forced through structural reforms on Italy’s economy, which laboured for so long under Silvio Berlusconi’s economically questionable tenure.

Mr. Monti has ruled out running for the position in next year’s elections, and despite his age (he turns 76 in September), a party official yesterday said that Berlusconi is likely to run for a fourth term. How the markets will react to another four years under Berlusconi is uncertain, but not likely to be positive, and could be affecting current bond yields.

German yields have dropped again; 10 year paper returns less than 1.3%, and nears its lowest ever levels, achieved in June when yields dropped below 1.2%. This is usually interpreted as a safe haven for investors, making decreasing German bond yields highly correlated with market uncertainty.

 

[Photography attributed to: Diliff / Foter]

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