Euro crisis: Italy's political turmoil hits global markets

Italy's political turmoil has sent shockwaves through the 19-nation Eurozone and stock exchanges worldwide; a look

Italy crisis
Before Italy adopted the euro, it had the power to raise or lower interest rates to affect the value of its currency - and Italy's economic competitiveness. A cheaper Lira made Italian exports more affordable in other countries, strengthening the economy at home.

The political connection
The impasse started with Italian President Sergio Mattarella's decision to block the formation of a "euroskeptic" (leaders of opposing closer links with EU) government. Italy's two populist parties have failed to form a coalition cabinet since March. The prospect of fresh elections, which was hinted on Sunday, and the possibility of Eurosceptic parties strengthening their position has hit financial markets and raised concerns about the eurozone's stability.

Italy bonds
Italy's 10-year bond yields, a measure of the country's sovereign borrowing costs, breached 3 per cent on Tuesday, the highest in four years. At the start of the month it was 1.8 per cent. This is the most since the Euro came into existence in January 1999.

Liquidity in Euro area  
According to London-based traders, liquidity in euro area bond markets dried up as dealers refused to offer quotes for parts of the Spanish bond market and most of Italy. On Tuesday, the premium to cover a default in Italy's debt jumped to the highest in nearly five years.

Big worry
The firewalls, on which the Eurozone is built, is sceptical of a rerun of its 2010-2012 debt crisis largely dependent on countries being willing to go along with the currency bloc's financial rules.
Eurozone members are divided over proposals to pool their budgets to provide mutual support in the event of a new debt crunch.
Ace investor George Soros said a surging dollar and a capital flight from emerging markets may lead to another "major" financial crisis, adding that the European Union is facing an imminent existential threat.

Markets worldwide
The tremors were felt worldwide with the Dow Jones industrial average in New York falling almost 400 points, or 1.58% on Tuesday as investors shifted money into the safe haven of US bonds and UK gilts, putting pressure on bank shares.

Stock markets in Asia
The markets also dropped steeply. The Nikkei in Tokyo was off 1.3%, while the ASX200 in Sydney fell 0.6%. The Kospi index in Seoul was down 1.57%.
 

Indian markets
In India, the Sensex and Nifty opened in the red tracking weak global cues, the Indian stock markets could see some near-term correction following the political turmoil in Italy.