The market rout is continuing, with Wall Street falling more than 2% in early trading.
Despite Greece's debt problem remaining unresolved, the main focus now is on Italy, with its bond yields soaring above 7% and putting it in danger of needing a bailout. Spanish bond yields are also rising, despite market talk that the European Central Bank is buying both Italian and Spanish bonds. This is uncharted territory for the Eurozone, and the problem is there seems no clear plan by any of the parties involved which would reassure investors that chaos can be avoided.
So in early trading the Dow Jones Industrial Average slumped nearly 300 points before pulling back to a 270 point decline. The FTSE 100 is now 126.01 points lower at 5441.33, while the German and French markets are down 2.5%. As the political crisis in Italy continues to unfold, the country's market has fallen 4.4%. Kathleen Brooks at Forex.com said:
These are worrying times for Italy. Even after Ireland had announced large budget cuts and public sector lay-offs, its bond yields continued to rise forcing it to seek a bailout, so Italian bond yields could move further even if Italy manages to get another government in place and implements fresh austerity reforms. Although Italy hasn't formally asked for help, these bond yields are totally unsustainable and it is unlikely that tomorrow and Monday's scheduled bond auctions will take place since Rome cannot guarantee that there will be willing buyers. The EU and IMF have sent representatives in to try and enforce fiscal reform, which is a bit like the diet-bailout option; however this isn't placating the markets.
The situation is critical, and if it is to be stabilised the ECB is going to have to step in to provide unsterilized support – i.e., become the lender of last resort. However, new ECB President Mario Draghi explicitly said that the ECB can't prop up Europe's bond markets because it is not in its mandate. The EU's leaders may have to act pretty quickly to change the Treaty if they want to prove to the markets they have the Italian situation under control. However, at this stage the ECB as financial back-stop is a political hand grenade, especially for Germany.
