Italian default fears hit markets
The turmoil on world markets intensified today amid fresh fears of an Italian default after the country’s borrowing costs soared to unsustainable levels.
Italy’s borrowing costs remained well above 7% today, which matches the levels that pushed Ireland and Portugal into multibillion bail-outs from the EU and IMF, sparking renewed fears the debt-laden country will default.
The FTSE 100 Index fell more than 1% at one stage on top of yesterday’s 2% slide, although it pared some of its earlier losses in another volatile period of trading.
The Dow Jones in the US fell 3% overnight, while the Hang Seng in Hong-Kong was down more than 5% amid fears over the future of Italy and the eurozone.
As one of the biggest economies in the eurozone, Italy is widely seen as being too big to bail out.
The serious nature of Italy’s problems is understood to have triggered discussions between France and Germany about how to split the currency bloc up to separate weak and strong countries.
Terry Pratt, a trader at IG Markets, said: “With Italy hurtling towards the brink as bond yields spiral, global equity markets are taking fright and traders are embarking on another flight to safety as they keep pulling money off the table.”
German and French officials have discussed plans that could involve some of the weaker countries leaving the 17-nation currency bloc, while the remaining nations push towards greater integration, according to reports.
The discussions come amid fears that a debt default by Greece or even Italy could sink the eurozone and cause chaos on financial markets.
Stan Shamu, a strategist at IG Markets, added: “The fact that Angela Merkel is now working on a plan to make it possible for European nations to exit the euro area shows a shift in dynamics for Europe.
“After the problems experienced with Greece, such a plan would make it easier for EU leaders to deal with a crisis in the future. In the near term though, this is likely to rock the boat further.”
The rise in Italy’s borrowing costs is an ominous sign that investors have lost confidence in the country’s creaking finances despite Prime Minister Silvio Berlusconi vowing to resign after key budget reforms are passed.
Elsewhere, the uncertainty on the continent was fuelled when Greek Prime Minister George Papandreou formally announced his resignation – but failed to name a successor.
Weak economic data from China and Japan added to gloomy predictions of another global recession.
