Risk Management, Trading & Portfolio Strategies

Italian government turmoil threatens borrowing cost hike

Italy's chronic governing problems could spell trouble for American investors.

Italy’s chronic governing problems could spell trouble for American investors.

During the turbulent days of 2010 and 2011, borrowing costs in the eurozone surged on fears that indebted governments were on the verge of collapse. These anxieties would have become reality were it not for the extraordinary efforts of the European Central Bank, the European Commission and eurozone heads of state that gathered and cobbled together a last-minute deal that averted financial meltdown. Despite the defects of their plan, they almost certainly spared the world further economic chaos.

The ghosts of that period have begun to appear in recent weeks, most notably in the latest governmental crisis to strike Italy. This year's election resulted in a fragile center-left/center-right coalition that included Silvio Berlusconi's party. Despite a tax-evasion conviction and his well-known history of public corruption, Berlusconi is still a powerful figure in Italian politics and has been viewed as a kingmaker. Yet his future is now in peril, following an ill-conceived gambit to trigger snap elections that resulted in several lieutenants from his party breaking off and declaring their own organization. How these events will play out remains to be seen, but for global markets, the developments are not welcome.

Why not? A sovereign's borrowing cost can have an impact on other nation's attempts to access credit internationally. This is known as "contagion," a word tossed around heavily during the first outbreak of crisis in the eurozone but one that has since fallen into obscurity. Investors, fearful of one country's financial defects, begin to react to signs of those problems in others. This infamously took down the Irish government in 2011 and has left countries such as Portugal virtually locked out of credit markets.

Will Italy's troubles impact U.S. investors? It remains to be seen. European and American banks are intricately connected, and funding issues on one side of the Atlantic have been known to stir volatility on the other. Portfolio monitoring is one option, and can be accomplished easily with the use of SmartStops. Learn more by exploring our website further today. 

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