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Italian election means stress for eurozone

December 11, 2012
By DAVID McHUGH , THE ASSOCIATED PRESS

FRANKFURT, Germany - Until last weekend, Europe seemed headed for a quiet Christmas and New Year's. Then Italy's Prime Minister Mario Monti unexpectedly announced he was going to resign, pulling the plug on a government that had boosted confidence in the country's ability to manage its debts.

The prospect of a return to a shaky government and finances has suddenly put new strains on the leaders of the 17-strong group of European Union countries that use the euro and their efforts to bottle up the region's debt and economic crisis.

Analysts warn that after several months of calm, the eurozone could now be in for a rougher ride as 2013 begins.

The concern is that, while the European debt crisis is not as bad as it was last summer, Italy's problems will spread and further unsettle other parts of the eurozone. Greece faces skepticism that it can keep paying its debts despite 240 billion in bailouts and Spain is still weighing whether to ask for a rescue from the eurozone's bailout fund.

Since it took office in November 2011 - after markets lost confidence in Premier Silvio Berlusconi's half-hearted attempts at reform - Monti's 13-month old government has managed to lower Italy's borrowing costs in the bond markets - albeit with help from the European Central Bank and its offer to buy short-term debt. His unelected cabinet of experts had until elections scheduled for April to implement reforms. Monti resigned earlier than expected after Berlusconi's party withdrew support for his government on Thursday.

Italy's borrowing costs started to rise again Monday morning as investors worried over who would keep the country on the path to recovery. The interest rate on Italy's 10-year bonds, a key indicator of the debt crisis, jumped to 4.75 percent. Last week they yielded only 4.4 percent - down from over 7 percent at the start of 2012. At one point during the day, Italian stocks slumped more than 3 percent.

"The uncertainty is significant, not just how the election will pan out, but how the government will turn out and what the debate is going to be like," said analyst Raoul Ruparel at the Open Europe think tank in London.

"And that's not something markets like. You add in the Greek uncertainty and Spanish uncertainty on top of that... and that's a worrying confluence of factors for a pretty fragile eurozone at the moment. "

The risk from Saturday's announcement is that heavily indebted Italy, the eurozone's third-largest economy after Germany and France, will now slow down or halt efforts to shake up its economy. The country's debt stands at 126 percent of its annual gross domestic product of 1.6 trillion ($2.1 trillion).

 
 

 

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