Investors have been on the edge recently as the Italian economy hangs in the balance. This is stemming from a possible debt crisis that currently looms if Italy decides to exit the European Union (EU). Investors have since responded to the news by dumping Italian bonds which has sent the two year Italian bond yield soaring to almost 2.7 percent; yields which were in the negative just two weeks ago. The ten year Italian bond increased its yield to 3.44 percent. This is the highest it has risen in over four years as bond prices fall.
Italian bonds aren’t the only instruments being dumped as investors are also dumping government bonds in other debt-heavy Eurozone countries such as Portugal and Spain. Even European banks are feeling the pinch as investors are also selling European bank stocks fearing that the banks will more than likely suffer losses on large bonds as prices continue to plummet. Italy’s largest bank UniCredit’s shares fell by 5.6 percent while Spain’s largest bank Santander fell by 5.4 percent.
How did Italy get to this point?
Italy had an inconclusive election in March of this year. Following that, there is currently a power struggle between the Eurosceptic populists and the Pro- European Union politicians. The Eurosceptic populists are those who are against the increasing powers of the EU and opposes the connection of a European country to the Union. It is said that the EU opposers won the election and choose a Finance Minister from within to oversee the government, however, the Italian President, Sergio Mattarella, vetoed the appointment in order to dispel the risk of Italy abandoning the Euro.
Given that the current government is displaying much uncertainty and division, Italy may be having re-elections soon.
Currently, Italy’s debt is 2.3 trillion Euro which is 135 percent of the country’s GDP.
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