Why are investors still nervous about Italian bank “doom loop”?

Italy’s banks remain a source of heartburn for investors more than five years after the worst days of the eurozone debt crisis sparked fears that a so-called doom loop between sharply rising government bond yields and troubled lenders could trigger wider financial chaos.

That’s in part because Italian banks, while making progress toward cleaning up their balance sheets, continue to add to holdings of sovereign debt—meaning that in times of crisis the doom loop swings back into action.

That dynamic was on display again Monday.

Italian government bonds fell sharply again, sending the yield on the 10-year bond, known as BTPs, 14.2 basis points higher to 3.563%, according to Tradeweb. The all-important premium demanded by investors to hold 10-year Italian paper over German government bonds widened to 301.3 basis points, or 3.013 percentage points, up from less than 1.2 percentage points in April, before the formation of Italy’s populist government.


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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam