US Markets Fall into Negative Territory for 2011 on Italian Debt Worries

Investors are worried about the overall Italian economy, with a new government in place. Financial market eased off of Italy eased temporarily on their short term bond auction today with borrowing rates on some government-issued debt dropping by half. But the political pressure on the government of Prime Minister Mario Monti remained high — and was rising.

It is one thing to come into office and pass several laws and resolutions; it’s another thing to have to actually put them in place.  Some of the new austerity programs have begun to take place, much to the dismay of the Italian people. How Monti, will be able to placate the population and maintain economic growth is difficult to see.

Much like Greece, implementing the austerity package is not as easy as it sounds the ramifications on the citizens and the effects it causes on business and the economic slowdown are hard for a politician to weather.

Yesterday the cabinet met to discuss measures to spur economic growth, Mr. Monti appeared to receive some breathing room when interest rates on six-month Treasury bills, a barometer of investor worry about Italy’s creditworthiness, dropped in half to 3.2 percent and rates on 10-year Treasury bonds dropped to 6.91 percent from above 7 percent, which was near the level at which other euro-zone countries like Ireland and Greece needed bailouts. But this is not a true indication of the markets and investors view points of Italy, it is investors taking advantage of the short term situation and it is been made quite obvious in the short term, the IMF and ECB will not let Italy go into default nor will they force investors to take haircuts. Short Term Bond purchases are pretty safe; it is the Long Term Bonds which will be auctioned today that has the markets worried.

Economist and investors agree that a larger test for Italy will come in a larger bond. Italy, the euro zone’s third-largest economy, must refinance almost 200 billion euros in sovereign debt by April, and if borrowing rates remain high, the country could face a solvency crisis that could threaten the stability of the euro.

Investor’s fears surfaced in the US markets with the S&P dropping into negative territory for the day, but also dropping below the yearly mark to show an increase year over year. The markets have just 1 ½ more days.  The S&P 500 Index SPX dropped 15.79 points, or 1.3%, to 1,249.64. All US markets closed in the red.