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Worries about Italy's debt crisis grip stock markets

November 9, 2011 |  7:50 am

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Stocks plunged around the world, with the Dow Jones industrial average falling over 275 points, as investors focused their attention on Italy's debt problems.

Just yesterday, investors took heart from the news that Silvio Berlusconi would step down as Italian prime minister after a long rocky reign. Today the focus shifted from Berlusconi to the problems that Italy will continue to have, no matter who is leading the country.

Yields on Italian government bonds rose to recent records this morning, signaling the distrust that investors have in Italy's ability to repay its debts.

The market yield on 10-year Italian bonds soared to 7.25%, up from 6.77% on Tuesday and the highest since 1997. The yield has surged from 5.93% just two weeks ago.

The Dow Jones industrial average was down 285.78, or 2.3%, to 11,884.40 in early trading. The broader Standard & Poor's 500 index fell 2.7%, 34.50 points to 1,241.47.

Leading indexes in Europe were down 2.6% in France and 2.2% in Germany.

As investors fled European markets, they poured again into U.S. Treasury bonds, sending the yield on the 10-year Treasury bond below 2%. The dollar gained in value against the euro.

Just a week ago, investors were breathing a sigh of relief as the European Union appeared to develop a package to bail out Greece from its debt crisis. Attention has now swiftly turned to the problems in Italy, which is much larger than Greece. With some 1.9 trillion euros in debt, most analysts say that Italy is too big for the European Union to bailout. Without a bailout, Italy could default on its bonds, sending shock waves through the international financial system.  

There are also questions about how willing Berlusconi will be to relinquish power, and how smooth any transition will be.

"Berlusconi’s announcement that he would resign once the government votes through economic reforms demanded by the European Union does not appear to have had the desired effect on market sentiment," analysts at Nomura Securities wrote in a note to clients this morning. "It has become clear that the saga could run well beyond the vote on the 2012 budget law next Tuesday."

RELATED:

 Europe fears Greece is heading inexorably toward default

Greeks in deal on new government in bid to save bailout, euro

Italy's Silvio Berlusconi to resign after economic reforms passed

-- Nathaniel Popper

twitter.com/nathanielpopper

Photo: Italian Prime Minister Silvio Berlusconi. Credit: Francois Lenoir / Reuters

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