Eurozone Crisis: Markets Spoil Monti's First Day At Work
Mario Monti faced a difficult first day as Italian prime minister, as markets kept up the pressure on the country. An auction of five-year bonds on Monday morning saw yields rise to 6.2%, compared with 5.3% a month ago, as Italy's cost of borrowing remained in focus despite a long-awaited change in leadership.
Yields on Spanish bonds also rose, with 10-year bonds hitting 6% for the first time since the summer, as the sovereign debt crisis showed signs of spreading to Spain.
Europe's main markets closed down, despite an early "Berlusconi Bounce". The FTSE 100 fell 0.47%, while the French CAC40 and German Dax shed 1.28% and 1.19%, respectively.
Silvio Berlusconi resigned on the weekend following a vote on financial reforms aimed at reining in government spending and trimming the country's debt, which currently stands at 120% of gross domestic product (GDP).
Spain, by comparison, has a relativelyely modest debt-to-GDP ratio of 60%, but there are concerns over the stability of its banking system. The markets had been giving the country a relatively easy ride for the past few months as they wait for an election later in November, which is expected to see a new, centre-right government win with a considerable mandate.
The creation of a technocratic cabinet was supposed to calm markets, and Monti's announcement that he intends to see through the current government's term until 2013 means that the politicking and delays that would have accompanied early elections should be avoided. However, markets are not convinced.
"It's only a short-term fix," Eurasia Group president Ian Bremmer wrote on Monday. "The Northern League is dead set against the new government and will vote on legislation on a case-by-case basis. And plenty of Berlusconi's former colleagues have already started calling for early elections. All of this means an uphill struggle for more controversial labor market and pension reforms-and the strong likelihood that this new "consensus" Monti government won't last its term."
"The Italian government failed to avoid a liquidity crisis. Italian politicians then took the risk of transforming a liquidity crisis into a credit event. By supporting a government of capable, well-respected technocrats, Italian politicians can stop the descent down a slippery slope," Deutsche Bank economist Gilles Moec wrote in a note to clients on Monday. However, Moec warned that the market turnaround would not be completed unless the European Central Bank (ECB) showed its willingness to intervene and put a ceiling on the cost of borrowing.
The "other Mario" - Mario Draghi, the new ECB president, has described the bank's programme of buying Italian and Spanish bonds as temporary. Signalling that the programme might be extended would give markets confidence that the two countries can meet short-term funding needs and avoid defaults.
The markets' rebound was always likely to be muted, with many of the questions they had over the future of the eurozone and its institutions still unanswered after the weekend. There was more bad news to come, as the Organisation for Economic Cooperation and Development announced that growth was slowing across all of the major developed and developing economies it covers.