London’s FTSE 100 index shed a painful 1.5% in early-morning trading on Monday, after the centre-left won Italy’s lower house by a minuscule margin but failed to topple a resurgent centre-right alliance with Silvio Berlusconi in the Senate. Other stock markets around Europe echoed London, with Italy’s own FTSE, the MIB falling 4.7%, and Paris and Frankfurt also jettisoning 2% of their value.
The news is perhaps worst for Italy, where the yields on 10-year government bonds rose from 4.48% to 4.77%. While this isn’t a huge increase, the original yield was still very high, and in a country on the verge of needing bailout money, higher borrowing costs will only make things worse.
Berlusconi, no doubt refreshed by a reviving overnight bunga-bunga party, said he is ‘not worried’ about the market reaction, even though analysts everywhere are concerned that a political stalemate will prevent the country from acting quickly on its debts. Spanish foreign minister Jose Manuel Garcia-Margallo said: ‘This is a jump to nowhere that does not bode well either for Italy or for Europe.’
But it’s not just European markets and bonds that have been hurt: the price of oil dropped 87 cents to $113.57 over fears that demand will fall in the eurozone; major eurozone banks were down more than 4%, and even Hong Kong, Japan and Australia suffered dents in their main stock markets.
So, the world really is worried about what will happen next in Europe. If Italy heads towards default and the prospect of a bailout becomes more real, it’ll be literally, seven times worse than the troubles with Greece, whose GDP is minute by comparison…