Bond spread widens to 260 basis points

Political uncertainty gnaws at investor confidence

Bond spread widens to 260 basis points

Rome, August 27 - Political uncertainty in Italy triggered market nervousness and widened the spread between the benchmark Italian bond and its German counterpart to 260 basis points by mid-afternoon Tuesday. That spread between 10-year Italian BTPs and the German Bund almost matched the 262 basis point spread between German and Spanish bonds. It was also significantly wider than Monday's Italian-German closing spread of 249 basis points. The spread between lending rates in the two countries is seen as an indication of investor faith in the Italian economy and its ability to cope with a lingering recession amid political uncertainty. The yield on 10-year Italian paper climbed to 4.43% by mid-afternoon, up from Monday's closing yield of 4.38%. Milan's top stock exchange plunged dramatically Monday amid investors' fears that Italy's fragile coalition government could collapse over a legal controversy involving ex-premier Silvio Berlusconi. The coalition involving Berlusconi's centre-right People of Freedom (PdL) party and the centre-left Democratic Party (PD) is also floundering over the future of the controversial IMU housing tax which the PdL campaigned on abolishing. However, the PD is adamant the tax should instead be reformed as government coffers cannot afford to lose the IMU revenues entirely.

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