Wednesday, November 09, 2011

Italian Collapse Feared

Selloff speeds up; Dow down more than 400 points

Worries that the European debt crisis was becoming more contagious slammed Wall Street Wednesday, pushing the Dow Jones Industrial Average down more than 400 points in afternoon trading.


U.S. stocks had been under selling pressure from the first clang of the opening bell after Italy's borrowing costs soared above 7 percent. Investors also wanted more action than just Italian Prime Minister Sylvio Berlusconi's promise that he would step down. They took their money and ran amid rising worries that Italy, Europe's third-largest economy, would not be able to deliver on promises to get its fiscal house in order.

Italy has replaced Greece at the center of the eurozone debt crisis and is teetering on the cusp of requiring a bailout that many say Europe cannot afford to give.

"You are dealing with a pretty substantial economy, you are not dealing with a Greek economy, you are dealing with something that is far more significant," said Barry Ritholtz, chief market strategist at Fusion IQ in New York.

"I don't think Italy can just walk away, they can't simply default whereas Greece can, because if they do that is the end of the euro."

The yield on the benchmark Italian government bond spiked above 7 percent, evidence that investors are losing faith in the country's ability to repay its debt. Greece, Portugal and Ireland required bailouts when their bond yields rose above the same mark. Unlike those countries, Italy's $2.6 trillion in debt is too large for other European countries to rescue.

In Greece, power-sharing talks fell apart between the country's two main political parties, raising doubt about whether the country will be able to receive the next installment of emergency loans it needs to avoid default.

Italian Premier Silvio Berlusconi promised late Tuesday to step aside after a new budget is passed, but there are concerns that the transition to a new government will be difficult. Markets see Berlusconi as an impediment to the kind of far-reaching economic reforms Italy needs to remain solvent.

"The market loves a quick solution and we're obviously not getting one," said Mark Lehmann, director of equities of JMP Securities. "We've had a strong rally off the bottom and any piece of bad news is going to be responded to negatively."

Markets fear that a chaotic default by either Greece or Italy would lead to huge losses for European banks. That, in turn, could cause a global lending freeze that might escalate into another credit crisis similar to the one in 2008 after Lehman Brothers fell.

Some analysts fear that the euro itself could fall, which would lead to inflation and a breakdown in free trade agreements in the European Union.

European markets also fell sharply. Italy's benchmark index plunged 3.8 percent. Germany's DAX and France's CAC-40 each lost 2.2 percent.



Unless Italy can restore confidence in its credit, it seems likely that a very dangerous economic situation may develop. The Italian debt is as oppressive as that of Greece and the political climate in Italy is as volatile. But the Italian economy is much larger, and the economic impact of an Italian default would be very much greater. As the costs of financing these ruinous deficit spending consequences become unbearable, fears are developing to the effect that the EEU itself is endangered.


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