Financial markets say Berlusconi must go now and not in weeks; yield on Italy's 10-year bonds surges over 7% mark

11/09/2011 11:35 am EST


Jim Jubak

Founder and Editor,

A huge jump in the yield on Italy’s 10-year bond has sent a wave of fear through global financial markets.

The yield on Italy’s 10-year government bond rose 0.88 percentage points to 7.65% as of 10:50 a.m. in New York. And the yield curve has now inverted with shorter-term bonds—the one year at 8.15%--paying more than the five-year at 7.71% and the 10-year bond.

This level of yield on the 10-year bond—above the 7% threshold that is generally regarded as the outer limit of what is sustainable for a government with Italy’s debt load to pay—plus an inverted yield curve that is signaling worries over immediate disaster—is exactly the pattern that led to collapse in Greece, Portugal, and Ireland and the need for a EuroZone bailout.

With market worries so intense investors and institutions are looking to add safety—and that has made the sell off worse. For example, London-based LCH.Clearnet, which clears about 50% of the $348 trillion global market for interest rate swaps, raised its margin call on Italian seven-year to ten-year debt by 5 percentage points to 11.65% this morning. That has led to more selling by traders and institutions that don’t want to put up the extra cash or for whom derivative insurance on Italian bonds is now too expensive.

So why the sell-off on Italian bonds today?

My thinking is that financial markets took a harder look at the delayed-action resignation of Italian Prime Minister Silvio Berlusconi and didn’t like what they saw.

Yesterday Berlusconi promised that he would resign after the Italian Parliament approved a new austerity package required by the EuroZone. Today, it emerges, that package hasn’t yet been written meaning that Berlusconi’s resignation isn’t effective very soon. The financial markets have apparently decided, and I’d agree with them, that this is just another Berlusconi trick, a way for his coalition to hold onto power longer and to negotiate the transition to a government that would be Berlusconismo without Berlusconi. There is even talk of new elections instead of a national unity government and that Berlusconi would run again in those elections.

All this has filled the market with fear that yesterday’s talk all meant nothing.

To which the financial markets have turned in a very clear no confidence vote.

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