National benchmark indexes declined in all of the 18 western European markets, except Greece and Denmark. Italy’s FTSE MIB Index (FTSEMIB) sank 4.5 percent, the most in six months. Spain’s IBEX 35 slid 3.8 percent for a sixth day of declines, the longest losing streak in 10 months. France’s CAC 40 plunged 3 percent for the biggest drop since April. The U.K.’s FTSE 100 dropped 1.6 percent and Germany’s DAX lost 2.5 percent.
The last four days have seen the biggest plunge in over six months with the IBEX (Spain -5.7%) and Italy’s MIB -6.7%. At the same time, Europe’s seemingly invincible OMT-promise-protected sovereign bond market has started to underwhelm. Italian bond spreads are 32bps wider and Spain 28bps wider – the biggest increase in risk in two months.
Rajoy denied on Saturday allegations that he and other leaders of his conservative People’s Party had received secret cash payments from a fund operated by the party’s former treasurer. Rajoy said he would publish details of his personal wealth and income tax states on the prime minister’s website.
Newspaper El Pais last week published allegations of illegal cash payments, featuring extracts from handwritten ledgers by the former People’s Party Treasurer Luis Barcenas showing payments to officials including Rajoy.
Polls show that 60pc of his own supporters do not believe the official explanation. A national petition drive calling for his resignation has already collected almost 800,000 signatures. Socialist opposition leader Alfredo Pérez Rubalcaba yesterday joined the chorus calling for Mr Rajoy’s head, saying the country had become 'ungovernable'.
The Italian scandal is related to Italy’s third-biggest bank, Monte dei Paschi di Siena, which has received two government bailouts and may yet have to be nationalized as its losses mount.
The bank is closely associated to Italy’s Democratic Party, whose leader, Pier Luigi Bersani, is leading in the polls, though slipping from his highs as former prime minister Silvio Berlusconi makes a late surge before the Feb. 25th general election. 'The Monte [banking] scandals now look like overwhelming the Italian election campaign and put [Mr.] Bersani and the Democratic Party’s victory at risk,' James Walston, political commentator at the American University of Rome, said in his Monday blog.
The Monte scandal centres on allegedly unreported derivatives deals that were apparently designed to hide losses and instead made the losses deeper. The bank, now under new management, has admitted that the derivatives losses might total more than €700-million.
In Italy, ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections, surging back into contention with vows to rip up 'German-imposed' austerity policies and cancel a hated property tax.
His Right-wing alliance has risen to 28pc in the polls, relishing a widening scandal at Banca Monte dei Paschi that has embroiled the Italian left.
So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.