Global investors are apparently freaked out by the political crisis in Italy.
There were demands by investors for higher returns against them taking on Italian government debt even as there was a downslide in the global markets on Tuesday.
There was a further dip of 3% for the main stock index in Italy extending its week-long losses. banking stocks in Italy are the hardest hit with a drop of over 5% in some stocks.
There are fears that the political climate in Italy could cause losses beyond its borders. While US stocks opened lower, there was a surge in the yields on Spanish, Portuguese and Greek debt.
One of the major concerns for investors that the new political leaders of Italy could halt adhering to the rules of the euro or even could want to move out of the single currency. This concern was reflected with a drop of 1% in the euro against the US dollar on Tuesday.
“A genuine euro crisis is the worst case scenario,” said Florian Hense, an economist at Berenberg Bank.
About 15% of the GDP of the eurozone if accounted for by Italy and its it’s the third largest economy in the block.
“In the unlikely case of a messy Italexit, eurozone growth outside Italy may stall for a couple of quarters while the authorities deploy their tools to contain contagion risks and shore up the most affected banks,” said Holger Schmieding, chief economist at Berenberg Bank.
The platform that the populists would run on in the new elections is not yet clear. However, according to analysts, it’s unlikely that Italy would ditch the euro.
However, there can be increased market tensions if a new Italian government increases spending.
The government debt of Italy is equivalent to more than 130% of annual economic output at €2 trillion euros ($2.3 trillion) driven by a stagnant economy for years and a shortage of reforms. That level of debt is the third largest in the world after Japan and Greece.
Because there is risk of the fiscal position and slowing down of the strategy for reforming the economy through the spending plans of the populists, ratings agency Moody’s issued a warning that it could further downgrade the credit rating of Italy which is currently just two notches above “junk” status.
There are also fears that populists in Italy could shy away from discussions with respect to organizing a referendum on the euro or leaving the European Union.
“Many voters, even if they are very unhappy with the status quo … do not really want to leave the euro,” said Schmieding. “They do not like the thought … that part of their savings may go down the drain in an exit from the euro.”
(Adapted from Money.CNN.com)