London (CNN) - Italy’s bond yields passed 7% Wednesday morning, breaching a psychological point at which markets consider countries at risk of being unable to fund themselves.
The dramatic rise in 10-year bond yields comes the day after Italy’s flamboyantPrime Minister Silvio Berlusconi said he would resign after the country’s budget is passed. The 75-year old Berlusconi has been a dominant force since forming the Forza Italia party in 1994, and his pending departure marks the end of an era for Italian politics.
But while the political spectacle that came with Berlusconi could now fade, the financial show might be just beginning. The pricing – set by traders who are selling Italy’s bonds – hit 7.3% by mid morning after breaking through 7% a short while earlier. “It’s like tectonic plates,” a desk analyst told CNN. “You have this pressure and then it breaks.”
To put Italy’s bond yields in context: Ireland bond yields were just over 8% before the country was bailed, Greek yields touched 10% and Portugal's hit 9%.
Italy and Spain – the eurozone’s third and fourth largest economies – are those often referred to as too big to fail. So far, the eurozone countries and the European Central Bank have actively kept the bloc’s struggling economies afloat.
But their powers may be limited when it comes to Italy. The numbers are huge, and the political - and financial - capacity to continue supporting the bloc’s weak will face a mighty test should Italy stumble.
The numbers are brutal. Italy’s economy makes up 17% of the eurozone. Combined, Greece, Ireland and Portugal – the countries currently living off Europe’s bailout fund and the International Monetary Fund – make up less than 6%.
Italy’s debt stands at €1.9 trillion ($2.6 trillion), or 120% of gross domestic product. Compare that to the combined Greece, Ireland and Portugal’s debt – around €640 billion as at full year 2010, according to Eurostat, the statistical office of the European Union.
Italy faces around €380 billion in bond repayments and deficit costs by the end of 2012, according to Evolution Securities' analyst Elisabeth Afseth. Its next major payment is €26 billion, due in February next year. With its funding costs now over 7%, that could prove an huge hurdle.
The oft-quoted 7% figure is, by and large, arbitrary. It is regarded as the level at which countries can no longer fund themselves - but depends on how long it stays at that level and how much the country needs to raise.
Vitally, however, it is a measurement of confidence and that – in these volatile markets – matters. When yields hit 7% it is extremely difficult to pull them back. According to Afseth, it is seen by investors as a "point of no return.”
And Italy’s situation is probably worse than the bond yields suggest, with the ECB’s intervention keeping the price of its funding down. According to Evolution Securities, the ECB began buying Italian and Spanish bonds on August 8 this year, after yields hit 6.08%. The following week, the ECB settled €22 billion of purchases. Last week, the bank settled €9.52 billion in purchases – the bulk of which were most likely Italian bonds, according to Afseth.
While the ECB – whose presidency has just been taken up by Italy’s Mario Draghi - has proved a key player in the survival of the eurozone to date, its patience appears to be growing thin. This week Yves Mersch, the governor of Luxembourg’s central bank and a member of the ECB's governing council, told Italy’s La Stampa the bond buys should be “limited in quantity and in time.”
He said if the bank’s interventions are being undermined by a lack of effort from national governments, “we should ask ourselves about the problem of incentives."
If Italy is forced to turn to Europe’s bailout fund, the outcome looks ugly. The fund is being enlarged to a lending capacity of €440 billion. Of that, around €140 billion has been committed to the bailouts of Greece, Ireland and Portugal, according to Afseth.
That leaves €300 billion – a sum that Italy would suck up, before needing more.
That leaves €300 billion – a sum that Italy would suck up, before needing more.
Plans to leverage the bailout fund, part of the triple-pronged attack on the crisis revealed after European leaders’ crisis meeting in October, will also suffer from the market’s plummeting confidence.
And so the markets watch and wait, as Italy’s “too big to fail” economy teeters on its financial tightrope
No comments:
Post a Comment