Money and Markets

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

Business Insider US
Italy fan before the match.

  • Italian 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:

By early Tuesday afternoon, the rand was down almost a percent against the dollar, to R14.34, it lost "only" half a percent against the euro (R16.54) 

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