Italy’s Political Crisis Sparks Eurozone-meltdown Fears, Stocks Fall Across the Globe

A day after Italy’s President Sergio Mattarella rejected the populist coalition’s nominee for the post of minister of economy which in turn led to the PM-designate resigning, global stock markets fell amid fears of another eurozone-meltdown.

The Dow in the U.S., which slid 505 points at its low, ended the day down 392 points, or 1.6%, at 24,361.45 as Wall Street reacted to the prospect of new elections in the eurozone's third-largest economy. Investors are worried about anti-euro political parties — 5 Star Movement and Northern League — gaining power in Italy, which could potentially lead to that nation's exit from the 19-nation currency union.

Fresh elections seem imminent in Italy after the President appointed an interim prime minister to head a caretaker government until a new date is set for another general election. The President in Italy has the power to veto the elected government’s choice of a cabinet berth however, as the two parties are seen as populist, Mattarella’s stand is being seen as an opposition to the people’s choice. The two parties are now demanding an election and intend to rally around their anti-Euro stand.

The political uncertainty in Italy slammed Italian bank stocks and government bonds, and knocked the euro down by almost 1% to a nearly one-year low vs. the dollar. Other countries that are considered economically weaker in Europe, like Portugal and Spain, also experienced losses in their debt, with their yields rising as their prices fell. Last Friday, the spread, or gap, between the yield on benchmark 10-year Italian bonds and its German equivalent reached 215 basis points, its highest level since 2014. More tellingly, German 10-year debt, a safe haven asset for nervous investors, enjoyed its best weekly gain since the acute phase of the euro-zone debt crisis in mid-2012, according to data from Bloomberg. The Financial Select Sector SPDR ETF, which tracks a broad basket of U.S. bank stocks, fell 3.3%.

Experts also say the populist government’s lack of experience puts into doubt their ability to rein in the country's massive national debt - equal to 1.3 times its annual output. Italy’s economic condition has often been called ‘too big to fail,’ which puts added stress on the European Central Bank which holds 15 percent of Italy’s bonds. On Friday, ratings agency Moody's had threatened to downgrade Italy's debt rating, citing a risk that the new government might fail to reduce its public debt.

(The above story first appeared on LatestLY on May 30, 2018 04:38 AM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).