Post-election Stalemate Fears Push up Italy’s Borrowing Costs

Italy’s borrowing costs have risen, the Milan stock exchange has fallen and world financial markets have reacted nervously to a potential political stalemate after the Italian election produced no clear winner, reigniting fears that the country’s large sovereign debt could rekindle the eurozone crisis without a strong government.

Yields on 10-year Italian bonds rose a third of a percentage point in early trading on Tuesday to 4.68%, their highest level this year, with the result also pushing up yields on Spanish, Portuguese and Greek bonds. The euro fell against the dollar in Asia to its lowest level since early January on renewed concerns over the eurozone’s debt crisis.

The likelihood that a coalition will need to be negotiated by Italy’s politicians came after results in the upper house, the Senate, where seats are awarded on a region-by-region basis, suggested that the centre-left Democratic Party under Pier Luigi Bersani had won around 119 seats, against 117 for former prime minister Silvio Berlusconi’s centre-right; both well short of the tally of 158 needed for a majority to govern.

In the lower house of parliament the Democratic Party will automatically get the majority of 340 out of 630 seats, thanks to winning 29.6% of the vote against 29.2% for its main rival. However, any coalition government that may be formed must have a working majority in both houses in order to pass legislation.

A poor showing by prime minister Mario Monti’s centrist bloc reflected the electorate’s distaste for Italy’s recent austerity measures that was exploited by both Berlusconi and comic Beppe Grillo, whose anti-establishment Five-Star Movement won more votes than any other single party, taking 25% nationally.

Italy’s borrowing costs have fallen in recent months, along with those of other eurozone members regarded as most vulnerable, helped by the promise of European Central Bank (ECB) support. However the election result confirmed fears of many European countries that the country would not produce a government strong enough to implement effective reforms – which Monti attempted to get underway with limited success, despite winning some credit for improving Italy’s public finances and also its international credibility since he replaced Berlusconi in 2011.

The election was the first opportunity for Italians to respond to the austerity measures being demanded of the country by other European leaders as a remedy for the ongoing sovereign debt crisis in the eurozone. Bersani’s ally, Enrico Letta said that the possibility of a hung parliament in the region’s third-largest economy would challenge the European Union’s (EU) austerity drive, regarded as being spearheaded by Germany’s chancellor, Angela Merkel. Grillo’s well-attended rallies during the campaign saw him attack Merkel as well as corrupt politicians.

Short-selling ban

Italy’s financial regulator, Commissione Nazionale per le Societa e la Borsa (Consob) has responded to sharp falls on the Milan stock exchange by imposing a ban on the short-selling of shares in Intesa San Paolo, Italy’s biggest bank, which fell by 10% in early trading.

“Short selling does not increase volatility in markets and banning it can actually increase it,” said David Lewis, head of European securities lending at SunGard. “Bans on short selling are often politically driven and usually a sign of underlying problems. Many studies have shown that such bans do little to support share prices while damaging liquidity and widening spreads, which are both bad news for investors. Short selling allows proper price discovery and is part and parcel of an efficient capital market.”

Elsewhere in Europe, politicians reacted “with a mixture of calm and concern” to the Italian election result, the BBC reported.

France’s finance minister, Pierre Moscovici, admitted that the result “creates problems” but would not undermine the European single currency. German foreign minister, Guido Westerwelle, urged Italy to continue its reform programme and said that its new government should be formed “as quickly as possible”.

However, Spain’s foreign affairs minister José Manuel García-Margallo said there was “extreme concern” about the financial consequences of the election result. “This is a jump to nowhere that does not bode well either for Italy or for
Europe,” he added. 

 

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