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Contagion still counts in Europe

Fiasco, the Italian word used in several European languages to describe a chaotic failure, seems an apt description for the Italian elections. Uncertainty in Italy is one thing, but in this crisis, it’s the contagion that counts.

After a tense two days of polling, there is no clear winner between the three leading players of the Italian general election: in one corner, Pier Luigi Bersani; in another, the comedian whose participation could wreck the political process; and in another, Beppe Grillo's Five Star Movement.

The result could prove a serious setback for the big leaps forward that peripheral eurozone borrowers have already made in their quest for market access this year.

Italy was chief among those, of course, bringing a €6bn 4.75% 2028 BTP on January 15. Further dollar and euro issues from Spain, a new syndicated OT from Portugal and Irish deals appeared to have quelled fears that peripheral European sovereigns could not raise money in the markets.

The Italian election has undone much of that good work. It may seem a little early to make this call, so soon after the poll results, but Spanish yields tanked on Tuesday morning in reaction to the Italian political mess.

Spain has a host of its own economic and political problems to sort out, of course, so Italian news should not be monopolising the direction of Bonos yields. But Spanish prime minister Mariano Rajoy has suddenly been shown the door marked “Outright Monetary Transactions” just when months of defiance seemed to have helped him and his country avoid having to knock on it.

Weeks, possibly months, of uncertainty over the direction of Italian politics and the country’s economy lie ahead. That Spain and others are not decoupled from that is bad news.

It is worth remembering that this fresh bout of volatility is nowhere near as bad as some of the episodes between 2009 and 2011. But it is especially painful because investors had started to suggest through their buying activity that they believed the worst of the crisis was behind them.

By hitting the panic button in a swathe of southern European markets on Tuesday, investors sent a strong signal to Europe’s leaders — those in office, and those to be installed — that the European sovereign debt crisis is merely in remission. 

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