Italy budget fears spark another selloff as 10-year bond hits 2014 high

Italy
fan before the match.

Reuters/Jason
Cairnduff

• I
  talian assets continue to sell-off
  over budget crisis fears.
• Markets are particularly worried that the dispute could
  cause ratings agencies to downgrade Italy’s credit
  rating.
• Those fears have pushed the yield on Italy’s benchmark
  10-year bond up to its highest level since 2014, passing above
  3.4%.
• The euro has also slipped on Tuesday. You
  can follow its progress at Markets Insider.

Key European markets are once again selling off on Tuesday as
investors continue to worry about possible negative consequences
of the Italian budget crisis.

Last week,
Italian stocks sold off sharply and bond yields spiked, as
the prospect of a rising national debt in the third largest
economy in the eurozone raised the prospect of a major clash with
European Union authorities.

Italy’s government wants to substantially increase the country’s
budget deficit, allowing it to finance major new infrastructure
projects and social welfare programmes. Doing so, however,

could put the country at risk of admonishment from
Brussels. 

“In case of a big mismatch and continuous clash, we won’t
rule out the future re-opening of an excessive deficit procedure
against Italy,” Paolo Pizzoli, an economist with ING said on
Friday.

Such fears have prompted concerns that ratings agencies could be
forced to downgrade Italy’s credit rating, which would in turn
push up borrowing costs, exacerbating the problems already
evident in the country.

“The size and composition of the Italian fiscal expansion
increases the risk of a series of credit rating downgrades and
could lead to difficult discussions with the European
Commission,” Goldman Sachs economist Silvia Ardagna said in
a note circulated on Monday.

Fitch, one of the big three agencies, has already cut the
outlook on Italian government debt. 
“The risk
of a reversal of structural reforms negatively impacting Italy’s
credit fundamentals has increased somewhat, in our view,” it said
on Friday.

“Fiscal and other policy risks are compounded by the
relatively high degree of political uncertainty.”

Fears of such a downgrade have pushed up yields on Italy’s
benchmark 10-year bond, which on Tuesday hit its highest level
since 2014. The bond hit a high of 3.442% in early morning trade,
although by 9.00 a.m. BST (4.00 a.m. ET) it has fallen back a
little to trade at 3.37%.

“Market skepticism on Italy and Italian assets is
well-justified and likely to persist,” Ardagna added.

That market scepticism has also infected the
euro on Tuesday, with the European currency falling around
0.3% against the dollar to trade at $1.1539, as the chart below
shows:

Markets Insider