The pound hit an 8 month high against the euro after Italian 10 year bond yields reached 7% for the first time, the level that triggered the bail outs of Greece, Ireland and Portugal in the last 2 years.
The euro fell across the board as Italy’s increasingly dire debt and political situation rattled investor confidence and negotiations on a new government of national unity in Greece reached an impasse.
Yields on benchmark 10-year Italian bonds eventually hit a record 7.37% ahead of another bond auction this morning. One commentator called it ‘game over’ for Italy, predicting the IMF would have to bail the country out in the next few months. However, there are fears that Italy, the third biggest economy in the euro zone with debts of £1.6 trillion or 120% of GDP simply has too much debt to be rescued.
The rise in yields came after the markets were left unmoved after Italian premier Silvio Berlusconi announced that he would resign as Prime Minister after pushing through economic reforms demanded by the European Union.
The Italian Senate is expected to rush passage of new legislation aimed at stopping the current crisis in Italian debt markets from snow-balling.
Bloomberg cites the German Finance Minister as having said that Italy may need to consider a request for EU aid.
Raj Badiani, senior economist at IHS Global Insight, is reminding clients that “we continue to argue that Italy remains solvent, and that it can survive several quarters of expensive debt auctions,” nonetheless, he adds, “a prolonged period of 10-year bond yields in excess of 7% alongside a faltering economy is a dangerous mix, and could send Italy’s debt dynamics lurching towards an unsustainable and ultimately insolvent position.”
In Greece, the country’s efforts to create a ‘national-unity’ government seem to be floundering. The present Prime Minister even gave a televised farewell address on TV only for it to later emerge that there was not yet a definitive candidate to substitute him.
The dollar also gained on the back of the euro zone woes as investors sought safety in the US currency with a corresponding sell off in high yielding risk currencies like the Australian and New Zealand dollars and South African Rand.
Today sees the Bank of England (BoE) decide on monetary policy for November. After the unexpected increase in the Quantitative Easing (QE) budget in October, it will be interesting to see if the continuing deterioration in UK economic data prompt the BoE to increase the QE budget for a second month in a row or whether they will pause for breath, particularly with current events unravelling in the euro zone.
This morning has seen the publication of the UK trade balance which shows a sharp deterioration in the month of October to £3.9 billion in September from £2.7 billion in August according to the latest released by the Office for National Statistics.
Commenting on the data, economists at Barclays Capital are indicating that, “Taken at face value the September data are rather worrying as they suggest the anticipated rebalancing of the UK’s trade position is far from materialising. However, it is worth bearing in mind that the trade data are unreliable and subject to large subsequent revisions. While we expect the UK’s visible trade deficit to remain substantial, this is likely to be driven by weak exports, especially as euro area activity contracts. Furthermore, we find the reported surge in imports hard to reconcile with the conditions in the domestic economy where demand has been significantly weaker than expected this year.”
