Markets slump as Italy's key rate hits 7%

Rising borrowing rates for many of the eurozone’s more indebted countries sent investors scurrying out of stock markets today, on a day that Italy’s prime minister-designate was looking to get the support of the country’s political parties for a technocratic government.

Despite a growing sense of relief that respected economist Mario Monti has been appointed to replace Silvio Berlusconi, markets are viewing developments in Rome with a fair degree of scepticism and the country’s key borrowing rate is rising again.

The yield on the country’s ten-year bond is up another 0.4 percentage point today to 7.01%, crucially above the 7% threshold that stoked panic last year that Italy’s finances were spiralling out of control.

It was that sort of rate that eventually forced Greece, Ireland and Portugal to seek multibillion euro bailouts – the problem this time is that Italy is the eurozone’s third-biggest economy and widely thought to be too big to save.

It’s not just Italy that’s facing rising bond market pressures. Spain’s equivalent rate is getting uncomfortably high too, rising a further 0.18 percentage point to 6.26%. And France, the eurozone’s second biggest economy, has seen its ten-year yield rise another 0.17 percentage point to 3.59%.

All this is proving an uncomfortable backdrop for stock markets, which have suffered a sharp reverse.

“This is an extremely worrying time for Europe as contagion is starting to become a very real possibility,” said Simon Furlong, a trader with Spreadex. “The stark reality (is) that there could very possibly be a domino effect in Europe.”

In Europe, Germany’s DAX was down 2.2% at 5,853 while France’s CAC-40 fell 2% to 3,047. The FTSE 100 index of leading British shares was down 1.3% at 5,447.

Wall Street was poised for big falls at the open too – Dow futures fell 1% t0 11,934 while the broader Standard & Poor’s 500 futures fell 1.3% to 1,236.

The declines came after despite figures showing that the eurozone managed to avoid contracting in the third quarter of the year. Instead, solid German and French growth figures allowed the 17 countries that use the euro to eke out growth of 0.2%.

However, there’s a growing view that the eurozone will soon fall back into recession as the debt crisis spreads and that’s weighing on the euro too, which was down 0.6% at 1.3539 dollars.

Slow growth makes deficits bigger in relation to the rest of the economy, and Greece acknowledged Monday that it would miss its deficit target for this year. In response, Prime Minister Lucas Papademos said he would speed up the reforms that are meant to make the economy more competitive.

And while investors were initially relieved that Monti, an economist, was taking the helm in Rome, concerns are re-emerging about the sheer amount of work his new government will have to do to restore faith in the country’s battered economy and finances.

Italy needs those borrowing rates to come down to avoid a big increase in its interest costs as some €200bn in public debt comes due through the end of April.

Earlier in the day, Asian stock markets were mostly lower. Japan’s Nikkei 225 index lost 0.7% to close at 8,541.93. South Korea’s Kospi index dropped 0.9% to 1,886.12 and Hong Kong’s Hang Seng fell 0.8% to 19,348.44. Benchmarks in Australia, Taiwan and Singapore also retreated.

Only mainland China’s Shanghai Composite Index closed marginally higher at 2,529.76.

Oil prices tracked equities lower – benchmark crude for December delivery was down 55 cents at 97.59 dollars a barrel in electronic trading on the New York Mercantile Exchange.