Barefoot Investor: Currency News: Italy's Financial Pressures Mount

The key take away from this week is not the weakest U.S. jobs data in nine months.
Nor is the take away from the week that European officials have yet to design a way to get the private sector to participate in aiding Greece without taking the risk that the rating agencies would recognize the scheme as a distressed exchange and give Greek bonds a default rating.

With the next tranche of aid to be handed over, there is plenty of time -- a couple months at least, for Europe to figure a way to square the circle.

Instead, the significant development this week is the pressure on Italy. Italian bonds sold off every day this past week and this brought the 10-year benchmark yield to its highest level in nine years.
The 40 basis-point increase is the most in a week since last January, as the Greece situation was what British English calls "hotting up." The premium Italy must pay over Germany has widened to almost 250 basis points, the highest under EMU.

Italy remains committed to a balanced budget in 2014. In an effort to achieve this the Italian government has unveiled a 40 billion-euro savings program. A Moody's analyst spoke for many when he questioned whether the political situation will allow for the effective implementation.

A combination of domestic political woes for Prime Minister Berlusconi and Finance Minister Tremonti, the slashing of Portugal's credit rating by Moody's, when both Moody's and S&P has Italy on negative credit watch, and nervousness ahead of next week's release of European stress tests conspired to undermine Italy.
There is also some concern that Italian banks, which are among the largest holders of Italian sovereign bonds, have a waning appetite to expand sovereign exposure, given the huge redemptions over the next 18 months.
The Bank of Italy Governor and the next ECB President Draghi seemed to counter market rumors that some Italian banks might fail this year's stress test. Italian banks slid today and a trading in a couple of large banks was suspended after they hit the exchange circuit breakers. (The Street)


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