“The cost of insuring against default on European bank debt surged to the highest in three months on concern deadlock in Italy’s elections will trigger a flight from risky assets as a political vacuum roils markets.
The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers climbed 12 basis points to 163, at 11:30 a.m. in London, the highest since Nov. 28 and headed for the biggest monthly increase since May. Contracts insuring Italy’s bonds rose 43 basis points to a 2 1/2-month high of 293, the biggest jump since December 2011.
Italy’s inconclusive election re-ignited jitters over Europe’s sovereign crisis, sparking concern a rejection of austerity measures will spill into other heavily indebted countries. Italy faces months of political turbulence which may see President Giorgio Napolitano install an interim government to write a new election law as the prelude to another vote.
“Gridlock in parliament means gridlock in the economy,” Alberto Gallo, the head of European macro credit research at Royal Bank of Scotland Group Plc in London, wrote in a client note. “The longer the instability lasts, the more the recession can deepen, pushing up unemployment, defaults and bad loans. In the worst-case scenario, the weaker banks could see deposit outflows re-emerge.” …”
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