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Bond Selloff Sparks Italy's Plea for Euro Zone Help

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Italy looked to the euro zone for political help on Wednesday as its bonds were hammered in the midst of a huge selloff. Markets continued to react to fears of debt contagion and a world economic slowdown; both Italy and Spain suffered, with 10-year bonds for each commanding 14-year high yields that in turn worried markets further.

Reuters reported that in emergency talks, Giulio Tremonti, Italy’s economy minister, met with Jean-Claude Juncker, chairman of the euro zone’s group of finance ministers. Silvio Berlusconi, the country’s prime minister, was scheduled to address Parliament later in the day in an effort to soothe roiling markets. Berlusconi has been staying out of the public eye of late, challenged with his own troubles.

Although a July summit meeting granted the euro zone’s rescue fund new authority to purchase bonds on the secondary market or to provide peripheral states with precautionary credit lines, neither of those new powers can be utilized until euro zone member parliaments approve them—something not expected till late September at the earliest.

In the meantime, the European Central Bank (ECB) could relaunch its bond buying program, which has not been active for four months. A similar move did help ease the situation last year.

In the meantime, markets have not been eased by the adoption of a rescue package for Greece, and the turmoil has spread, driving peripheral nations’ bond yields to unsustainable levels. In a radio interview, Finnish Prime Minister Jyrki Katainen was quoted as saying, “Italian and Spanish bond yields rose to their new record highs. This is a very alarming and scary thing. The whole of Europe is in a very dangerous situation.”

Fears of political instability in Italy and a resulting inability to enact or enforce financial reforms is driving concerns now, with Rome overtaking Madrid as the chief euro zone worry. Bond yields reflected market concerns; Spanish 10-year yields hit 6.28% Wednesday in morning trading, with Italian 10-year yields nearly catching up at 6.16%.

West LB rate strategist Michael Leister was quoted in the report saying, “For both Spain and Italy, the 7% level in yields is the one everyone is focused on. Although we’re still quite a decent amount away from that, any break of the 6.50% level is going to be a catalyst to get to those higher rates.”