Today's Coming Crisis Movie

Thursday, July 28, 2011

Europe's hot summer as Italy and Cyprus join sick list: Cyprus' debt now also downgraded

Fears of recession in Italy and the Germans' reluctance to back the EU's bail-out fund with real muscle have set off fresh eurozone tremors, pushing yields on Southern European bonds back to levels seen before last week's emergency summit.

News that Moody's had downgraded Cyprus two notches from A2 to Baa1 due to "fractious politics" and exposure to Greece compounded fears Europe's crisis is far from resolved.

The darkening picture in Cyprus raises concerns that a fourth eurozone country might soon need some sort of rescue, exhausting bail-out tolerance in Germany, Holland, Finland and Slovakia, where a wing of the coalition has denounced the EU accord.

"The markets have started to see all the flaws in the summit deal," said David Owen, of Jefferies Fixed Income. "They know there has been no increase in the size of the European Financial Stability Facility (EFSF) and that it will not be any position to intervene in the Spanish and Italian markets for quite some time because the changes have to be ratified by all parliaments."

"Unless the European Central Bank (ECB) steps in to buy bonds, this is going to be tested by markets over the summer. EU leaders have sent absolutely the wrong signal by thinking they have done the job and can now go on holiday," he added.

Yields on Italian 10-year bonds spiked to 5.8pc on Wednesday while Spanish yields punched through 6pc once again. Analysts remain perplexed by the decision of Italy's treasury to cancel bond auctions in mid August due to lack of liquidity and "reduced financing needs". Italy was expected to raise €68bn (£60bn) in August and September. (more)