Italian Election Deadlock Sends Stocks and Bonds Lower While CDS Rise

“Italian stocks and bonds fell, while the cost of insuring the nation’s debt against default climbed to the highest this year, as the country’s election deadlock reignited concern Europe’s debt crisis will deepen.

The FTSE MIB Index slid 4.6 percent at 1:17 p.m. in Rome as UniCredit SpA and Intesa Sanpaolo SpA, the nation’s biggest banks, slumped at least 8 percent. Italy’s 10-year bond yields jumped 29 basis points to 4.78 percent after rising as high as 4.93 percent. Credit-default swaps insuring Italian bonds jumped as much as 43 basis points to 293, the highest since Dec.

As results pointed to a hung parliament, Italy was headed toward a political stalemate that threatens to derail 15 months of austerity under Prime Minister Mario Monti’s technocrat government, reviving speculation the country will struggle to pay its debt. Italy, the world’s third-biggest debtor after the U.S. and Japan, is in its fourth recession since 2001.

“Given last year’s sharp economic contraction, it is not wholly unsurprising that the electorate is suspicious of the need for further reform,” Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, wrote in an e- mail. “Without it, however, there is a heightened risk that investors will remain suspicious of the ability of Italy to improve competitiveness and growth potential sufficiently to allow a significant reduction in its debt pile.” …”

Full article