Eurozone countries have been battered, Italy in particular, as the fears over the Eurozone sovereign debt crisis escalate. Furthermore, the cost of insuring Italian sovereign and bank debt against default has soared to unprecedented heights.
Italy’s five-year credit default spread widened to over 500 basis points for the first time on record, at 505 basis points. At 1250 GMT, the spread had stabilized at 503 basis points, up 36 from its Friday close.
Italy is subject to wide speculation that Moody’s Investors Services Inc. will downgrade its credit rating, after it put Italy on review for downgrade from Aa2 on June 17. Standard & Poor’s Corp. already rates the country A+, below the Moody’s rating.
“It could be any time now,” said Alessandro Giansanti, credit strategist at ING Bank NV, referring to Italy’s downgrade. “And as much as a one notch downgrade is already priced in current spreads, it would add negative sentiment,” Giansanti said.
On Monday, Italy sold EUR11.5 billion in three-month and 12-month bills at a sharply higher yield than the previous auction. The average yield on the 12-month bill rose to 4.153% compared with 2.959% at the previous auction Aug. 10. Ahead of an important market test Tuesday with longer maturities up to 10-years, the yields testify the deteriorating demand for Italian paper, now mainly composed of domestic institutions and support from the European Central Bank, according to Giansanti.
Sentiment over the euro-zone sovereign debt crisis is at a low point due to a number of issues, starting with the resignation of European Central Bank Executive Board Member Juergen Stark last Friday due to a conflict over the ECB’s bond-buying program.
Greece is battling against time to avoid a default on its sovereign debt. Over the weekend, the country’s government announced more austerity measures in an effort to satisfy its fiscal targets and be eligible for the next tranche of international aid.
Echoes of the unraveling sovereign crisis were felt strongly this morning on the European banking system, pushing CDS indexes of financial companies to record wides.
French banks are leading the widening, with the expectations that Moody’s could downgrade the three major French banks this week, due to their sovereign debt exposure to Greece and other peripheral countries.
Close followers are Italian banks, which face similar hurdles over their Italian sovereign debt exposure, coupled with their domestic environment in which growth prospects are seriously hindered.
London, September 12, 2011, (Dow Jones)
