Foreign Exchange Report : GBP EUR Rate Could Rise as Italian Bond Yields Hit Euro-Era High and Berlusconi Clings to Power

November 8, 2011 - Written by James Fuller

STORY LINK Foreign Exchange Report : GBP EUR Rate Could Rise as Italian Bond Yields Hit Euro-Era High and Berlusconi Clings to Power

The Pound Euro exchange rate (GBP EUR) is 1.1663. The Pound Dollar exchange rate (GBP USD) is 1.6078. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5558.

The political situation in Greece appears to be coming under control, for the moment at least, with the resignation of Prime Minister Papandreou apparently close at hand. The formation of a new ruling coalition of unity is expected imminently, buying Greece a little more breathing space in its ongoing battle to bring its spiralling debts under control.

However, yesterday was predominantly a ‘bad news’ day for Europe’s single currency, thanks to escalating fears over Italy’s ability to service its €1,5tn national debt. The markets appear to be losing confidence in the Italian administration’s ability to implement the austerity measures which the country has promised to adhere to. This caused the Interest rate that Italy’s government is having to pay on its bonds to rise to a Euro-era high of almost 7% yesterday.

Analysts feel that this level of yield is unsustainable for anything longer than the very short-term. This raises the distinct possibility that Italy, the Eurozone’s third largest economy by GDP, may go the way of Ireland, Portugal and Greece in approaching the EU/ECB/IMF for emergency bail-out funding. This could have a dramatic effect of the market’s confidence in the Eurozone’s financial stability.

Italy’s current Prime Minister, Silvio Berlusconi responded to rumours that he is set to resign by posting a message on Facebook yesterday afternoon, stating that he would continue in his role. Such erratic behaviour almost always goes down badly with the markets and yesterday was no exception, with the GBP EUR rate coming within a whisker of an 8-month high in early trading this morning.

Berlusconi faces a key vote on Italy’s budget in parliament this afternoon. If he loses the vote, it is likely that he will have to face a vote of ‘no confidence’ before the end of the week. Ironically, the instalment of a new Italian leader, who had a clear plan on how to tackle Italy’s debt, might well improve sentiment towards the Euro.


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