The Monte dei Paschi effect

Italian banking 5yr CDS

What a difference a bank crash makes, Rome. After Monte dei Paschi di Siena–the world’s oldest bank–required a bailout, in which the Italian state will also take part, the previous trend of more relaxed premium risks has reversed direction. Since the first weeks of January, the cost of protection against default on 5-year Italian sovereign bonds has spiked by more than 50 basis points, Afi analysts told investors Thursday in Madrid.

The change makes more difficult a recovery of the Italian equity markets. In fact, pressure is now mounting on all Italian quotations, both on the credit markets and stock trading, triggered particularly by the performance of the banking sector.

So far, the contagion chain between Italy and Spain in the troubled eurozone’s periphery seems to have left Madrid virtually untouched. Costs of protection against defaults on Spanish sovereign and banking debt have been unaffected. Nevertheless, Afi explained, “the risk over interest rates is higher than over the credit risk on public debt. That means that credit is getting more expensive for everyone in the eurozone: German 10-year bonds haver reached 1.7 percent, while Italian bonds in general have seen an increase of 15 basis points.”

The index of business confidence in Italy fell in January to 88.2 from 88.9 last December, and against market expectations of 89.5 points. According to experts, it could signal a further contraction of the economy of -2.3 percent like in the last three months of 2012.

About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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