(11 Jul 2011) The spread between 10-year Italian bonds and Germany's benchmark has reached a new record as investors worry the country may become engulfed in Europe's debt crisis.
The spread hit 300 points late Monday afternoon.
The interest rate on a 10-year Italian bond was 5.67 percent while the rate on the German equivalent, considered the safest in the eurozone, traded at 2.81 percent.
Raffaele Oriani, Corporate Finance Professor at Luiss University in Rome, said there had been "anomalous investments," mainly through short-selling of Italian bonds, which had effects on the prices of Italian bonds and on the spread between Italian and the German bonds.
"These investments will probably try to exploit the recent approval of the economic law that Italy just approved," said Oriani
"At the moment it is difficult to say whether these trends in the international market really reflect some long term beliefs of investors or just speculative efforts to gain money in the short term," he added.
The Milan stock exchange fell despite a limit on short-selling set by the stock market regulator, but the move appeared to have little impact.
Banks led the decline as the FTSE MIB's closed down 3.96 percent after the New York opening.
Unicredit dropped by as much as 10 percent and Intesa San Paolo by 9 percent, before recovering a bit on closing.
Fiat Industrial and Telecom Italian also were among the worst performers.
"These losses of Fiat, Banca Intesa, and Telecom can be explained by a general counter-effect, in the sense that when the financial system and the economic system of the country is at risk, clearly the main companies operating in that country are exposed to losses related to the general economic environment," explained Oriani.
Beginning on Monday, all traders must reveal their short positions when they reach 0.2 percent or more of a company's capital.
The measure runs through September 9.
Italy's high debt of nearly 120 percent of GDP and poor growth prospects have made it vulnerable to the eurozone's debt crisis.
Two ratings agencies have put the country on notice that it needs to get its public finances in order or risk downgrade.
Investors are concerned that the debt crisis, which has so far been contained to the small economies of Greece, Ireland, and Portugal, could soon drag down bigger countries like highly indebted Italy and unemployment-ridden Spain.
The mere size of their economies could easily overwhelm the rescue capacity of the rest of the eurozone.
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