MARKET:ITALIAN BOND yields yesterday saw their biggest one-day rise since the launch of the euro amid fears that investors had lost confidence in the world's third-biggest debt market.
In a sharp worsening of the euro zone crisis, Italian 10-year bond yields rose nearly three-quarters of a point to 7.48 per cent – a level considered unsustainable by many economists.
The Italian bond sell-off, which sparked a fall in the euro, European equities and bank stocks, was triggered by a move by clearing houses to increase the cost of margin payments for trading the country’s bonds.
The markets were also hit by worries that Rome would not drive through necessary economic reforms swiftly given the uncertainty following Silvio Berlusconi’s announcement on Tuesday night that he would step down as prime minister.
Traders said that intervention by the European Central Bank stemmed the rise in Italian yields.
The central bank was reported to be buying small amounts of bonds to settle the markets. However, Italian 10-year yields remained well above 7 per cent, prompting some investors to suggest the market had lost confidence in Italy’s ability to tackle the debt crisis. John Stopford, head of fixed income at Investec, said: “We have seen huge movements in Italian yields, taking us to levels that look unsustainable. We are at or approaching a tipping point in this crisis.” The intense market pressure appears to have focused minds in Rome, with politicians across the spectrum agreeing to pass emergency economic reforms through parliament within days, possibly by Saturday, to be followed by the prime minister’s immediate resignation.
Giorgio Napolitano, head of state, said that market fears that Italy would be paralysed for a prolonged period were groundless.
He is working to find parliamentary consensus for the formation of an interim government led by technocrats. Failing that, he said he would dissolve parliament and call early elections, the route favoured by Mr Berlusconi.
Corrado Passera, head of Intesa Sanpaolo, Italy’s largest retail bank said: “I believe an election now would not be the right thing and would make the situation of the markets even worse.”
LCH Clearnet, Europe’s biggest clearing house, imposed additional margin charges on the use of Italian bonds as collateral in “repo” trades, a move that previously led to both Ireland and Portugal being forced to seek emergency rescue loans. However, the biggest worry for some is contagion spreading to France, which saw its premium over Germany to borrow in the markets jump to fresh euro-era highs.
One economist said: “France is the next country to watch. If French spreads and yields start rising in a similar way to Italy, then that really would be the tipping point for this crisis and potentially the end of the euro.”
– (Copyright The Financial Times Limited 2011)