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Forex: Eurozone Debt Crisis Knocks Out Italian Leader

Christopher Vecchio

The Euro-zone debt crisis may have consumed another leader this weekend, with revered technocrat Mario Monti losing power over the Italian government, signaling new elections sometime in February 2013. Accordingly, both Italian and Spanish yields are on the rise, weighing on risk-appetite to start the week.

The Euro was already looking weak headed into the new week, having just come off two days of significant declines in a row as a result of the disappointing European Central Bank Rate Decision on Thursday. With a mix of the potential for a rate cut as well as the increased likelihood that Spain will not take a full sovereign bailout this year, the fundamental backdrop working against the Euro is difficult in the near-term. It got worse this weekend.

Italian Prime Minister Mario Monti, amid a fracturing government due to declining support from former Prime Minister Silvio Berlusconi’s party withdrawing support for the current coalition, has announced his resignation. This could be a major setback for the Italian part of the crisis, with the man booted from office for getting the country into crisis readying to retake control. Since former Prime Minister Berlusconi left office, Italian borrowing costs have plummeted, with the 10-year bond yield shedding over 2% (200-basis points). Despite recession, Italy is expected to meet the European Union’s 3% deficit-to-GDP ratio this year.

The question now is: What will happen if former failed leaders retake control? Silvio Berlusconi is expected to campaign on an anti-austerity, anti-Germany platform, as if to vilify the Monti government that has helped move Italy away from the brink. If you want to know whether or not this is viewed as a positive, there’s nowhere else necessary to look but for the bond markets, which are suggesting that more volatility – and thus uncertainty over Europe – may be ahead in 1Q’13.

Taking a look at European credit, peripheral bond yields are slightly higher, weighing on the Euro to start the week. The Italian 2-year note yield has increased to 2.352% (+41.8-bps) while the Spanish 2-year note yield has increased to 3.036% (+3.0-bps). Likewise, the Italian 10-year note yield has increased to 4.850% (+42.9-bps) while the Spanish 10-year note yield has increased to 5.595% (+17.4-bps); higher yields imply lower prices.


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