French Referendum: Italian Bonds Hit

What, you may ask, has Italian government debt got to do with the French ‘no’ vote: everything would be my answer. (If you want to know more about this, thumb down my euro posts). The lack of a convincing advance towards political union makes Italian government debt riskier, so they have to pay more interest. This is, at present just a small breach, but it is one which is widening, and I fear this is the point at which the euro dyke will eventually breach:

The euro hit a fresh 7-month low against the dollar and Italian government bonds came under strain on Monday after French voters gave a decisive thumbs-down to the proposed European Union constitution…………….The strains the French vote could have on the euro zone were reflected in government bonds. The spread on Italian BTP bonds over German debt touched 23 basis points, the highest level since November 2002, as so-called peripheral euro zone bonds suffered.”

The problem is that the markets have now ‘wised up’ to the problem, and will now be tracking Italian government debt as an issue in itself.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

3 thoughts on “French Referendum: Italian Bonds Hit

  1. Last week, the “Economist” had a title page labelling Italy as “The real sick man of Europe”.

    Was this the first Italian bond auction after that issue ?

  2. Edward, I do believe you have hit the nail on t he head, what is strange is the divergance is not new, but it seems that Sunday’s results have focused minds upon it.

  3. “I do believe you have hit the nail on the head”

    Thanks :).

    Actually this is not the first time I have mentioned this on this blog. You are right though, minds are now focused on this, and I think it is a problem which is only going to grow: each time there is bad economic news from Italy, or each time the EU has a ‘mini crisis’ the spread on Italian bonds will grow, until what started out as a tiny crack, becomes a gaping hole.

    Khr I don’t think it is only the Economist, Martin Wolf in a very influential article in the FT questioned the viability of the eurozone, for exactly these reasons. There is now a growing consensus among commentators on the fact that Italy has a problem with no evident solution.

    btw we are not necessarily talking about auctions here, but the price at which ‘second hand’ government bonds trade in the open market, and the effective interest rate they carry according to the price at which they trade.

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