One point which it may well be interesting to watch for as we move through 2008 is the way in which the eurosystem evolves under strain. One particular point of interest will be the emergence of a yield differential for the Spanish banking system, another will be the performance of the "spread" on Italian government debt.
With this in mind it is worth noting that the difference in yield between Italian 10-year bonds and the benchmark German bunds increased to the most in almost a decade earlier this week. The spread between German and Italian bonds widened to 52 basis points on Tuesday, the most since October 1998, when it was as much as 61 basis points.
The European Commission halved its 2008 growth forecast for Italy on Feb. 21, saying slumping confidence and rising prices may push the Italian economy to the brink of recession. The economy will grow 0.7 percent this year, the European Union's Brussels-based executive body said, revising down a November forecast of 1.4 percent growth.
The spread between the 10-year bund, the euro region's benchmark, and similar-maturity Greek bonds also widened to the most since 2001. Greek notes yielded 52 basis points more than similar-maturity bunds, 5 basis points more than Monday and the widest spread in almost seven years.
Italy's long-term foreign-currency debt is currently rated Aa2, the third-highest investment-grade rating, by Moody's Investors Service and two steps lower at A+ by Standard & Poor's. Greece is rated A1 by Moody's, its fifth-highest rating, and one ranking lower at A by S&P.
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