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What next for Italy?
by Sarah Miloudi on Feb 26, 2013 at 15:01
Italians' rejection of austerity has wrenched focus away from the hunt for yield sharply back to political risk.
But let's make no bones about it, the events that unfolded in Italy could have been seen in any city in any indebted part of the eurozone.
The political impasse might have sent the yield on 10-year paper to 4.9%, but as Monument Securities strategist Stephen Lewis argued, the wider unhappiness in markets should hardly come as a great shock.
Spain has its own troubles, he pointed out, with the popular outrage about corruption in government circles and in the higher echelons of society stubbornly lingering and causing unrest over the weekend.
'Investors should draw the lesson that the euro crisis is not primarily a problem to be solved by financial engineering but stems from the roots of economic and social life in many of the zone’s members,' he said, adding that for too long financial markets have been relying on the European Central Bank's outright monetary transactions (OMT) scheme as a backstop for peripheral debt markets.
Indeed, the fallout from the Italian elections has been far from acute. Asian stocks were dumped overnight while in the UK the FTSE 100 shed some 85 points at its open.
Invesco Perpetual's Jeff Taylor, head of European equities, believes what happens next in Italy is key.
While the Italy's centre left, centre right and the five star movement, race be first to form a solution, Taylor said some sort of an agreement would be well-received.
'If a coalition can be hammered out then market nerves will be soothed,' he said, although he admitted the Italian election chaos marks another bump in Europe's rocky road to recovery.
But for Edward Bland, Duncan Lawrie Private Bank's markets expert, a solution in Italy - and therefore wider stability - is still some way off.
He said: 'With no clear indication of a straightforward answer, the big question is how long the government will be held in this state of deadlock. And how long therefore, the markets will suffer.'
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