Italian bond yields jump sharply higher

Italian Prime Minister Mario Monti has said he will stand down once next year's budget is passed.

Story highlights

  • Mario Monti's decision to stand down as PM has prompted yields on 10-year Italian bonds to rise above 4.8%.
  • Italy's main stock market benchmark fell significantly further than its peers in opening trade.
  • Monti's year in office has seen a turnaround in investor confidence towards Italy and its reform efforts.

Italy's government borrowing costs jumped and its stock market fell sharply on Monday after Mario Monti's weekend decision to resign as Italy's prime minister earlier than expected.

The yield on 10-year Italian bonds rose 28 basis points to a two-week high above 4.8 per cent after analysts warned financial markets to brace for a fresh outbreak of eurozone political turbulence.

Mr Monti has said he will step down when the country's 2013 budget passes into law, which could be as early as this month, triggering an election in mid to late February, six weeks ahead of schedule.

His announcement sent firmly into reverse the steady falls in official borrowing costs that Italy has enjoyed under Mr Monti, whose year in office has seen a turnround in investor confidence towards the country and its reform efforts. Early last week, the country's 10-year bonds were trading on yields below 4.4 per cent, the lowest for two years. Italy faced increased costs in a bond auction planned for Thursday, analysts warned.

"Markets have grown too complacent about Italy," argued Silvio Peruzzo, economist at Nomura. Jim Reid, senior strategist at Deutsche Bank, added: "One would now expect Italian risk to trade nervously until some clarity emerges as to the post election administration."

Italy's main stock market benchmark fell significantly further than its peers in opening trade. The MIB lost 3.5 per cent to 15,144.16 in Milan, against a 0.5 per cent fall on the FTSE Eurofirst 300. Intesa Sanpaolo lost 6.7 per cent to €1.1950 and Banco Popolare was 7.2 per cent weaker at €1.0590.

Spain's bond market also saw pressures mounting with the country's 10-year bonds trading up 17 basis points at yields of 5.6 per cent.

Both Spain and Italy have seen their borrowing costs fall significantly after this summer's assurances by the European Central Bank that it would act as a backstop to prevent the eurozone's disintegration.

Investors fear that Mr Monti's departure could pave the way for a possible return to power of Silvio Berlusconi, the former Italian prime minister -- although analysts noted that opinion polls suggested his chances were slim.

"We view Berlusconi's return as worrying because his most recent declarations have had a clear-anti European tone," said Nomura analysts in a note. "In particular, he has been very critical of Germany and the line of austerity imposed by the European partners on Italy and on other countries that faced a deterioration of their bond markets."

There were some hopes over the weekend that Mr Monti could be persuaded to stand in the upcoming election, triggered by the withdrawal of support for the governing coalition from Mr Berlusconi's centre-right People of Liberty (PDL), the largest party in parliament. Mr Monti, an unelected technocratic prime minister, believed the development means he no longer has a mandate to govern.

Separately, Greece extended the offer to use paper issued by the European Financial Stability Facility to buy back Athens-issued debt at a steep discount until December 11. The yield on its 10-year debt rose to 14.6 per cent.

The euro fell under $1.29 to $1.2896.

      Europe's financial crisis

    • German Chancellor Angela Merkel talks with Finance Minister Wolfgang Schaeuble during a session at the Bundestag (lower house of parliament) on June 25, 2013 in Berlin.

      Schaeuble: 'Don't see' bailouts

      German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
    • IBIZA, SPAIN - AUGUST 21:  A man dives into the sea in Cala Salada beach on August 21, 2013 in Ibiza, Spain. The small island of Ibiza lies within the Balearics islands, off the coast of Spain. For many years Ibiza has had a reputation as a party destination. Each year thousands of young people gather to enjoy not only the hot weather and the beaches but also the array of clubs with international DJ's playing to vast audiences. Ibiza has also gained a reputation for drugs and concerns are now growing that the taking and trafficking of drugs is spiralling out of control.  (Photo by David Ramos/Getty Images)

      Spain keeps partying

      Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
    • The Euro logo is seen in front of the European Central bank ECB prior to the press conference following the meeting of the Governing Council in Frankfurt/Main, Germany, on April 4, 2013.

      OECD: Slow recovery for Europe

      The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
    • The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.

      Europe's new threat: Slow decay

      The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
    • Packed beaches and Brit pubs? Not necessarily. Here's what drew travelers to one of Spain's most beautiful regions in the first place

      Spain aims for big tourist summer

      Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
    • Photographer TTeixeira captured these images from a May Day protest in Porto, Portugal, Wednesday by demonstrators angered by economic austerity measures. "People protested with great order, but showed discontent against the government who they blame for this economic crisis," she said. "They want the government to resign and the Troika [European Commission, International Monetary Fund and European Central Bank] out of this country."

      May Day protesters flood Europe

      As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
    • Croatian Prime Minister Zoran Milanovic delivers a speech in Mostar, on April 9, 2013. Prime Ministers from Bosnia's neighboring countries arrived in Bosnia with their delegations to attend the opening ceremony of "Mostar 2013 Trade Fair".

      Croatia PM: We need Italy to recover

      As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
    • Anti-eviction activists and members of the Platform for Mortgage Victims (PAH) take part in a protest against the government's eviction laws in front of the Popular Party (PP) headquarters in Mallorca on April 23, 2013.

      Spain's unemployment hits record

      Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
    • People protest against the Spanish laws on house evictions outside the Spanish parliament on February 12, 2013 in Madrid, Spain.

      Welcome to Madrid: City of protests

      Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.