Italian Political Crisis Drives Up Borrowing Costs

10 Dec 2012

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Italian Prime Minister Mario Monti


Italian Prime Minister Mario Monti's imminent resignation drove up the country's borrowing costs on Monday, as markets took fright at the prospect of a return to an old-style Italian political crisis.

The spread between Italian BTPs and German Bunds widened to 349 basis points from 325 late on Friday and BTP future shed more than a point on concern over Monti's departure.

On Saturday, the 69-year-old former European commissioner unexpectedly struck back against Silvio Berlusconi's People of Freedom (PDL) party which withdrew support from his government last week, reports Reuters.

After meeting President Giorgio Napolitano on Saturday, Monti announced he would resign as soon as the 2013 budget is passed.

The vote was already scheduled for no later than April and will now likely take place in February, but it may unnerve markets especially since Berlusconi announced his intention to seek a fifth term as prime minister.

Berlusconi was forced to resign last year during a ballooning euro zone debt crisis that had pulled Italy into its vortex while his government put off needed reforms, and amid a sex scandal involving his "bunga bunga" parties.

Opinion polls give the 76-year-old billionaire little chance of success, with the center-left Democratic Party (PD) under Pier Luigi Bersani holding a strong lead. But the campaign could renew uncertainty about Italy's commitment to reform.

A former communist who is close to Italy's unions, Bersani has promised to stick to the promises on fiscal discipline the government has made to European partners and has said that Monti is likely to continue playing a role after the election.

The main barometer of investor confidence, the yield on the 10-year Italian government bond, spike up to 4.74 percent although that is way below the 7.3 percent peak hit last year when the spread with German Bunds hit 550 points.

Analysts said higher Italian bond yields could be short lived, especially if Monti makes clear that he will play a role in ensuring stability, either by returning to government or in a role such as president of the Republic.

Tags: Business, World, Borrowing Costs

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