10-year Italian-German Bond Spread Hits 4.52, New High; EUR/USD, Banks Are All Red

10-year Italian-German Bond Yield Spread (Bloomberg)
The 10-year Italian-German Bond Yield Spread is at 4.52, +11%, and the 5-year Italian-German bond yield spread is at 5.27, +11.53%. Since German bonds are considered the safest government bonds in the euro zone, spreads widen when sovereign debt fears rise. I wrote about the 10-year Italian-German spread back in June when it initially broke out to new highs. The 10-year Spanish-German spread broke out in July. Watch the charts on Bloomberg.com to monitor sovereign risk in Europe. It is too bad Bloomberg.com took down down sovereign CDS quotes and charts. For a whole list of spreads to German bunds go to my post with links.

At the end of October, the market was very optimistic that the EU Summit deal reached to save Europe would go as planned. Read the full EU Summit Statement on the plan (the leveraged EFSF aka European Financial Stability Facility, 50% Greek debt haircut and austerity measures). However, now Greek Prime Minister George Papandreou is calling for a referendum (1, 2, 3, 4) that could put the EU plan at risk since 58% of Greeks (1, 2) are against the plan. This puts contagion risk back on the table again if government bond yields continue to rise, Greece defaults, and/or credit default swaps, toxic sovereign debt holdings and sovereign collateralized swaps (repurchase agreements) force collateral calls on banks and then bankruptcy filings. If the plan fails, will the ECB print euros?

Italian government bond yields are spiking today (2y-yield at 5.25 +5.23%, 5y-yield at 6.07 +3.18%, and 10y-yield at 6.19 +1.69%) and EUR/USD is at 1.36923 -1.14% back below the 50DMA. European banks are also getting slaughtered: National Bank of Greece -12%, Eurobank -15%, Societe Generale -14.67%, Credit Suisse -8%, Barclays -8.25%, RBS -7.97%, Banco Comercial Portugues -10.97%, Commerzbank -8.78%, Danske Bank -9.33%, UniCredit -11.32%, Deutsche Bank -9.18%, BNP Paribas -9.57% and Credit Agricole -10.84%. Click the links for updates. Are Belgium's Dexia Bank, Greece's Proton Bank and (uhh) MF Global the only victims of the euro crisis so far?

In other news, UBS believes "mainland Europe" will be in a recession next year, and China's PMI (manufacturing) dropped to the "lowest in almost 3 years (Bloomberg). After failing at the 200 day moving average, EUR/USD broke through the trend line and pierced the 50DMA again. SPY is down 2.06%.

5Y Italy-German Bond Yield Spread Bloomberg

EUR/USD (freestockcharts.com)