What's going on?

Mamma mia! The recently-elected Italian government is stirring up controversy on markets before it�s even taken office � in a way that�s reminiscent of the financial crises that rocked Europe just a few years ago.

What does this mean?

A new government�s about to take power in Rome, led by two anti-establishment parties � Five Star and the Northern League. They�ve just concluded controversial talks on a power-sharing agreement, which hinted at terms that would let Italy issue a form of government “IOUs”. These could develop into a separate currency from the euro � just like Greece considered in 2015 before “Grexit” nearly went down. Maybe an �Italexit� from the eurozone isn�t entirely off the cards…


The new government�s also proposing welfare spending that would need to be financed by borrowing. But with a debt load that�s already pretty hefty, some investors are starting to doubt the Italian government�s creditworthiness and are selling off the government�s bonds.

Why should I care?

The bigger picture: Government bonds are generally considered risk-free investments.

Since a government usually controls its country�s central bank, it can print as much money as needed to pay back investors. This isn�t exactly the case in the eurozone, though, where nineteen governments rely on one central bank: the European Central Bank (ECB). Investors have learned the hard way that the ECB might not actually bail out individual governments � so government debt in the eurozone isn�t exactly risk-free.

For markets: Signs of discord in the eurozone will likely continue to be negative for the euro.

After gaining against the dollar for a big part of 2017, the euro has been slipping as the �broad-based economic recovery� in the eurozone is looking short-lived. If the US Federal Reserve continues to raise interest rates (it�s next expected in June), the dollar is set to gain as investors buy up US currency. As interest rates go up in the US, it becomes more attractive for investors to move their money into the country, where simply leaving it in the bank should generate an improving return.