Credit Suisse: Italian and Spanish yields could climb above 9%

Credit Suisse has warned government bond markets could come under further pressure as the region tackles its worst ever crisis, sending yields on ten year Italian and Spanish bonds spiking above 9%.

In a research note sent out to clients yesterday the investment bank said the lack of political and fiscal unity in Europe has left the euro facing its "last days as we currently know it".

The note, entitled ‘the last days of the euro', argues eurozone leaders must reach "a momentous deal" towards fiscal and political union by mid- January to save the 17-nation bloc.

"We seem to have entered the last days of the euro as we currently know it," said Credit Suisse in the note.

"This does not make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen - probably by mid-January - to prevent the progressive closure of all of the eurozone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks."

Credit Suisse said with such a major crisis facing the region, the borrowing costs on the debt of Italy and Spain could soar much higher.

"Pressure on Italian and Spanish bond yields may get quite a lot worse even as their new governments start to deliver reforms - 10-year yields spiking above 9% for a short period is not something one could rule out."

Credit Suisse also warned French yields could rise above 5%, while adding German bunds will also climb until a deal is thrashed out.

The group added it expected France and Germany would strike a 'momentous' fiscal unity deal, which will result in the European Central Bank finally caving in to the sustained pressure for the body to step up its bond buying programme of peripheral debt.

"We believe market pressures will effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible," the note said.

"This will be the requirement needed for the European monetary authority to agree to provide the bridge-finance which will prevent a systemic collapse."