Italian bond yields jump amid political turmoil

Nathan Andrada – Fourth Estate Cooperative Contributor

Rome, Italy (4E) – Following Italian Prime Minister Mario Monti’s decision to resign earlier than expected during the weekend, government borrowing costs rose sharply during Monday’s trading.

In a statement to the Italian media last week, Monti said that he would submit an “irrevocable” resignation as soon as the government passes the budget law, citing the breakaway of Silvio Berlusconi’s People of Freedom Party (PDL) from the coalition government.

Italian 10-year bond yields jumped by 28 basis points to a two-week high of more than 4.8 per cent following warnings from analysts that the financial markets could get a beating from the potential outbreak of fresh euro zone political turmoil.

Credit default swaps on Italian debt rose to 288 basis points, higher by 33 basis points. This means that an extra €33,000 will be paid by the investor each year for five years to ensure that €10m in Italian sovereign bonds will be default-free.

The budget for 2013 could be passed into law as early as this month, resulting to an election by February, or six weeks ahead of schedule.

The situation in Rome could trigger new political turbulence in Europe’s third biggest economy and complicate matters for the EU in advancing reform in the banking sector and containing the region’s sovereign debt crisis.

Movements in the Italian bond market have also mounted pressure for Spain’s bond market with yields of its 10-year bond hitting 5.6 per cent, higher by 17 basis points.

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