The political turmoil in Italy sent shock waves to the global stock markets as the markets plunged amid demands by protestors for higher yields. The main stock index of Italy fell by another 3 percent while many banks hit the hardest. There was a general atmosphere of panic and investors worried that the turmoil could spill over the Italian borders as yields on Greek, Spanish and Portuguese debts increased and even the US stocks opened lower.
There are widespread fears that the new elections could turn into a referendum on Euro in reality. The populist party just failed to form the government. Many investors believe that Italy will also move out of EU a possibility which has been popularly dubbed as Quitaly. It is possible that the new political leadership in Italy completely ditches Euro in coming days. The concerns of investors were apparently seen in the drop of Euro against US dollar. Italy is the third largest Eurozone economy which alone contributes 15% to the share of GDP. The Italian economy is also larger than Greece. Italian exit from Eurozone will lead to a jolt in its growth for a couple of quarters as the concerned authorities shore up their most affected banks. Even though Italy may not leave Euro, but the increase in expenditure by the new government could definitely keep the worries high as the current debt of Italian government is more than $2.3 trillion which is more than 130% of its annual economic output. This is the third highest figure of debt in the world after Japan and Greece. The current situation can further cut the credit rating of Italy which as per Moody is only two points above the junk status. Majority of the Italian debt lies in the country although a sizeable portion is also owned by the European Central Bank in addition to banks in France, Luxembourg, Spain and Germany.
Asian stock markets also showed apparent slump due to Italian tremors along with renewed US-China trade war. Investors are pulling out of riskier assets like stocks. Furthermore, the tough US stance on China and the announcement to proceed ahead with the 25% tariffs on goods worth $50 billion from China and new limits on Chinese investments have triggered more panic. Latter came as a surprise for most of the world as two weeks before US and China had announced that a consensus had been reached whereby both the nations had agreed to put the new tariffs on hold.