Italian debt fears hit markets after IMF invite

LONDON—Markets turned lower yesterday despite solid US jobs figures as worries over Italy’s debts grew after global leaders failed to agree on how to increase the firepower of the International Monetary Fund. Most market attention centered on Europe’s debt crisis and the news that the Group of 20 leaders have yet to provide flesh to their ambitions to boost the IMF’s financial strength did little to boost confidence. Market sentiment had been buoyed earlier by relief that Greece will not hold a referendum on its latest rescue deal, which would have endangered Europe’s crisis-fighting efforts. Athens remains a key focal point, but Italy is slowly becoming the main market worry as it is considered to be too big to bailout, even with an expanded eurozone bailout facility.

Italy’s borrowing costs have spiked higher towards levels that forced Greece, Ireland and Portugal to be bailed out. The yield on Italy’s ten-year bond is up another 0.32 percentage point at 6.43 per cent, a new euro-era high. A yield above seven per cent is widely thought to be unsustainable. News that Italy’s Premier Silvio Berlusconi, who is trying to push through his third austerity package in less than six months, has asked the IMF to help monitor its economic and fiscal reforms has only reinforced market worries over the country’s debt burden, which stands at around 120 per cent of national income, the second highest in the eurozone behind only Greece.

What’s particularly concerning is that Italy’s borrowing costs have spiked higher, even though the European Central Bank has been buying the country’s bonds in secondary markets in an attempt to keep the yields down. “The risks associated with Italy have increased markedly over the past week or so,” said Jeremy Batstone-Carr, director of private client research at Charles Stanley. Those concerns offset any remaining relief from Greece’s abandoned referendum. In Europe, the FTSE 100 index of leading British shares was down 0.4 per cent at 5,526, while Germany’s DAX fell 2.5 per cent to 5,978. The CAC-40 in France was 1.6 per cent lower at 3,142.

The retreat in stocks pushed the euro lower — when sentiment is buoyant the currency often advances as it did on Thursday. It was trading 0.6 per cent lower at US$1.3742. Earlier in Asia, stocks ended a four-day losing streak following Thursday’s recovery in Europe and the US. Japan’s Nikkei 225 index rose 1.9 per cent to close at 8,801.40. Hong Kong’s Hang Seng jumped 3.1 per cent to 19,842.79. South Korea’s Kospi gained 3.1 per cent to 1,928.41. Mainland Chinese shares tracked advances in the region, with the benchmark Shanghai Composite Index adding 0.8 per cent to 2,528.29 while the Shenzhen Composite Index gained 0.6 per cent to 1,071.34. Benchmarks in Australia, Singapore, Taiwan, India, Indonesia and Thailand also rose.

AP