New European banking crash fears

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A FRESH European-wide banking crash has reared its head as the euro tumbled to a six-month low yesterday in reaction to the Italian crisis. As the collapse of stocks deepened by midday investors had begun flocking to gold, in a new ‘gold rush’, hoping to cling to something of some value.

By mid-day euro gold prices jumped to 11-month highs breaking above 1,130 euros per ounce.

The global markets were reacting sharply to the prospect of another Italian election as early as September with European shares across the board slumping.

Italy’s benchmark FTSE MIB sank in morning trade, down 3%, meaning billions of euros were wiped off the value of shares. The UK’s FTSE was down 1.37%, Germany’s Dax down 1.85%, and France’s Cac down 2%. Italy’s short-term borrowing costs jumped to the highest since the peak of the eurozone debt crisis in 2012.

The sell-off in Italian bonds deepened, with the yield on two-year debt breaking through the 2% barrier. This was the biggest one day jump in 26 years. The country’s Gross Domestic Product (GDP) to National Debt ratio is currently at 131.8%. In other words, even if everything the country produced was used to pay off the national debt, it would come nowhere close. If a country’s national debt reaches 100% of its GDP the country is bankrupt, so at 132% Italy is in serious trouble.

The turmoil was triggered by the anti-EU Five Star and League political parties abandoning their attempts to form a ruling coalition after a standoff with President Sergio Mattarella. He had vetoed their choice of a eurosceptic finance minister.

President Mattarella, who was installed by a previous pro-EU government, refused to accept the nomination of eurosceptic candidate Paolo Savona for finance minister on Sunday. Instead, he set the country on a path to another snap vote by appointing former International Monetary Fund (IMF) official Carlo Cottarelli as interim prime minister. Cottarelli, who became known as ‘Mr Scissors’ for his reputation regarding cuts to public spending in Italy, is now tasked with the planning of fresh elections and passing the next budget.

The VIX index, the so-called ‘fear index’ which shows investors’ expectations of near-term market volatility leapt yesterday. It jumped 17% to 15.49, the highest level since the beginning of May.

Meanwhile, the pan-European Stoxx 600 fell 1.6%, with banks the worst-performing shares, and the euro fell against the dollar and the pound.

Five Star and the League won 33% and 17% of votes respectively in March’s election. Both parties have called for mass demonstrations on Saturday to defend ‘Italian democracy’ against the dictatorship of the European Union.