(This story has been posted on The Wall Street Journal
Online's The Euro Crisis
blog last week at http://blogs.wsj.com/eurocrisis.)
By Katie Martin
"Oh yeah, Italy. Forgot about that."
That's the line in financial markets Wednesday.
For a week or so, traders seemed to forget all about it.
Cyprus was the only game in
town, with shock at the initial deal put together and
wrangling over how to forge a new
one.
The drama is not over, clearly. Capital controls on the
island could be in place for
months. Savers and holders of bank bonds may never sleep
quite so easily in their beds
again, amid genuine confusion over whether the Cyprus bailout
may prove to be a model for
others in future. (If you drink an espresso every time you
see a conflicting headline on
this theme, you'll be feeling pretty wired by now.)
Still, there's a deal for Cyprus. The worst-case scenarios
have not materialized,
yet.
So, traders and investors appear suddenly to have
remembered that Italy held an
election last month, and there's still no government in
place. This is what everyone
was worrying about before the Cyprus crisis came along.
Helping to jog traders' memory, Pier Luigi Bersani -- he
who was expected to be
king by this point -- today saw a fresh setback in his
efforts to form a governing
alliance after the upstart Five-Star Movement refused to back
him. Given that Mr. Bersani
says he would never seek an alliance with Silvio Berlusconi's
center-right
coalition, it is tough to see a way forward.
"Only an insane person would want to govern this country,
which is in a mess and
faces a difficult year ahead," Mr. Bersani said.
The ratings firms are circling, with Moody's Investors
Service offering a reminder
in an interview with Reuters Wednesday that it's looking at
the Italian political
deadlock carefully in relation to the country's ratings.
This is not going down terribly well. Italy didn't have a
government last week,
either, but suddenly this issue is in the spotlight.
German government bonds -- the safest of safe assets in the
euro area -- are up at
their strongest levels since August, as investors seek, well,
safety.
Italian government bonds, meanwhile, are feeling the pinch.
Yields on the
country's 10-year bonds have reached their highest point in
three weeks. The
pressure is not as great as it was immediately after the
February election, but it's
clear to see. In a bond auction Wednesday, Italy had to pay
the highest yield on
five-year bonds since October. Again, it wasn't a washout of
an auction, but it was
on the weak side.
The euro is plumbing fresh four-month lows.
It all goes to show that when the market wants to get its
teeth into something, it
does. And that traders can concentrate on only one thing at a
time.
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