People stand in front of a "debt clock" screen displaying Italy's public debt in Rome last February. Photo: AFP/Filippo Monteforte

Market chatter today focused on Turkey, which suffered another big dip in its currency parity after reports of the impending resignation of a senior central bank official. Far more important for the market’s appreciation of risk, though, was the continued climb of Italian bond yields.

With US$2.3 trillion in government debt, Italy is big enough to shatter the system. Brazil, with about US$500 billion of hard-currency debt (and considerably more in foreign assets) is a major annoyance but not a systemic threat.

All the less so is Turkey’s US$300 billion or so in hard-currency foreign debt a major threat to financial stability. Of even smaller importance is Argentina, whose currency blew up again today.

In the absence of political news, Italy’s 10-year sovereign bond yield trundled past its previous recent high point. The market has no confidence that the odd-couple coalition of the amorphous Five-Star Movement and the Northern League will navigate through Italy’s perpetual budgetary crisis.

There are hypothetical solutions to Italy’s problems, but none of them are accessible as long as the present government is in power. An Italian pessimist thinks that everything is hopeless; an Italian optimist believes that there is hope, but that things have to get worse in order to get better.

Although Brazil and Italy have little do to with each other, Brazil’s currency was close to an all-time low and its stock market lost 3.5% in dollar terms, in the absence of political news. Investors have dumped Brazilian assets in the advent of unpredictable national elections, but there was no particular reason to dump them today, except that investors are weeding their portfolios of higher-yielding, riskier securities.

Late in the session wire services reported that President Trump is ready to impose tariffs on another US$200 billion of imports. That pushed equity indices further into the red, but the underlying dynamic is much simpler: Investors are loath to take on more risk and eager to shed it in the wake of a series of accidents and policy faux pas.

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