December 1, 2023

Markets Weigh Concerns Over Italy’s Debt

As investors fretted about a new wave of financial instability, the euro slumped to its lowest level since March and borrowing costs rose again for Europe’s weaker economies.

In midday trading, the Dow Jones industrial average was flat, with a gain of just 5.26 points, to 12,511.02 points. The Standard Poor’s 500-stock index was also largely unchanged, at 1,320.27, and the Nasdaq composite was down 9.91 points, or 0.35 percent, to 2,792.71.

European indexes, after declining sharply in morning trading, regained some ground in the afternoon. The Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 0.58 percent. The FTSE 100 index in London slid 1.02 percent.

In the day’s most dramatic action, the main Italian stock market index slid more than 4 percent in morning trading, before bouncing most of the way back, after Giulio Tremonti, the economy minister, returned to Rome early from a meeting of euro zone officials to take charge of discussions on new austerity measures and the government successfully sold one-year debt.

Mr. Tremonti is considered by many investors to be instrumental to Italy’s bid for market credibility. Silvio Berlusconi, the embattled prime minister, led investors to ditch Italian debt last week when he suggested Mr. Tremonti might be forced out of the government.

Italy has begun moving into the front of investors’ consciousness, but the question of how to aid Greece remains unsolved. In a letter to Jean-Claude Juncker, the president of the euro zone finance ministers’ group, the Greek Prime Minister George Papandreou complained that market turmoil was undermining his government’s efforts at economic reform, and called for “collective forceful decisions” from his European partners.

European finance officials met for six hours Monday in Brussels but failed to resolve a long-running dispute over private sector involvement in a second bailout for Greece.

“If Europe does not make the right, collective, forceful decisions now, we risk new, and possibly global, market calamities due to a contagion of doubt that could engulf our common union,” Mr. Papandreou wrote.

Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a research note that Greece was not the euro zone’s main problem. “Instead, the massive contagion from the small periphery to the big bond markets of Italy and Spain in the last four trading days has turned into the real problem,” he said.

Asian shares were down across the board. The Tokyo benchmark Nikkei 225 stock average fell 1.4 percent. The main Sydney market index, the S. P./ASX 200, fell 1.9 percent, In Hong Kong, the Hang Seng index fell 3.1, and in Shanghai the composite index fell 1.7 percent.

Data released Tuesday showed that bank lending in China had remained more buoyant than expected in June, fanning expectations that Beijing may tighten lending requirements or raise interest rates again in its battle to contain inflation.

The Bank of Japan governor, Masaaki Shirakawa, said that global economic growth was “slowing somewhat,” Reuters reported from Tokyo. “The U.S. economy faces severe balance sheet adjustments, and sovereign problems pose a risk to Europe,” he said.

Also on Tuesday, Moody’s issued a list of Chinese companies that raised “red flags” at the ratings agency because of possible governance or accounting risks, causing the shares of those companies to tumble.

New York crude oil futures fell 0.4 percent to $94.76 a barrel.

The euro slumped, falling to $1.3992 from $1.4029 late Monday. The dollar fell to 79.64 yen from 80.26 yen, signaling that Japanese investors were becoming more risk averse and repatriating overseas funds.

The worries about Italy have further shaken already fragile global market sentiment. Even though Italy retains solid debt ratings, a sound banking system and a relatively small budget deficit compared to the size of its economy, it is plagued with high debt, feeble growth and political paralysis.

The jitters prompted the Italian stock market regulator on Monday to impose emergency rules against short selling after shares in Italian banks slumped for a fifth straight session.

The cost of insuring Italy’s sovereign debt against default surged to an all-time high, and the interest on its 10-year bond leaped to 5.8 percent before falling back.

“The current escalation of the euro area periphery crisis is the third period in which the problems facing Greece, Ireland and Portugal have seriously threatened more serious contagion in the euro area,” Paul Robinson, an analyst at Barclays Capital, wrote in a note.

As grave as the situation is, however, he added, “the previous episodes during which Spain and Italy were significantly affected proved temporary, and the situation facing both economies is far less serious than in Greece’s case.”

Bettina Wassener reported from Hong Kong. Niki Kitsantonis contributed reporting from Athens.

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