Global stocks sink as Italian bond yields soar

Wed Nov 9, 2011 7:24am EST
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By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - The euro zone debt crisis kicked into a new gear on Wednesday as Italian bond yields soared into levels widely deemed unsustainable, causing a sharp sell-off in stocks and the euro.

Wall Street also looked set to open lower as fears about Italy, the world's eighth-largest economy, spread.

Yields on 2-year and 10-year Italian bonds rose above 7 percent. The curve measuring the yields inverted for the first time in the euro era -- a clear signal of rising concern among investors that they may not get their money back.

The moves came despite pledges by Prime Minister Silvio Berlusconi that he will resign after parliament passes budget reforms. His often controversial presence at the top has been viewed by many in the markets as a block to fiscal reform.

"The mere fact that Italian 10-year bond yields have hit the all important 7 percent level shows that the crisis will not end simply with Berlusconi's excruciatingly slow demise," said Joshua Raymond, chief market strategist at City Index.

Investors were also keeping an eye on Greece, which was struggling to create a consensus government under a new, yet-to-be-agreed prime minister.

A plan for former European Central Bank vice-president Lucas Papademos to lead a Greek government of national unity has run into trouble, party sources said on Wednesday, prolonging political hiatus as the country heads toward bankruptcy.

World stocks as measured by MSCI were down 0.8 percent, while in Europe the FTSEurofirst 300 lost 2.2 percent.   Continued...