The Italian Bond and the Deepening Eurozone Crisis for the Investors

The Italians on protest

The investors were caught in an uncertain situation on last Friday when two Italian debt auctions were met with bleak offers of purchase, signaling that Europe’s crisis are worsening with the passage of time. As the hopes attached with the improvement in financial situation of Europe receded in oblivion over a couple of weeks the clients were left with little options.

Italy was compelled to sell 8 billion of 6-month bonds at 6.5 % and 2 billion of zero-coupon bonds having maturity of two years, at 7.8 %. These selling had attracted 3.54 % of yield for 6-month bonds and 4.63 % for zero-coupon bonds about two months back.

Meanwhile the European Central Bank declined to step up as they did not want to write a blank check. The country has to make her direction clearly defined in terms of the fiscal plan so that the Bank can take any action.

Italy is under a debt of 1.9 trillion with a debt-to-GDP ratio of around 120 %. Being the Eurozone’s third biggest economy the chances of her failure were considered dim. The ex prime minister Silvio Berlusconi was forced to quit because of the worsening economic situation. Mario Monti has taken over the seat of chief executive but will have to work hard for some time to repair the damaged economy.

Europe’s largest bond market is run by Italy. On last Friday the ten-year Italian bond remained above 7 %. This was an indicator of crisis for the investors as same situation had earlier led Greece, Portugal and Ireland to ask for the bailout packages.

France and Spain are the next countries to worry about the dismal economic conditions though the European leaders have pledged to settle the problems amicably. France is the second and Spain is the fourth largest Eurozone economies. The possibility of defaults and downgrades are also haunting the governments of these countries.