Politics have driven the markets for months now, but yesterday’s price action showed a clear signal to Italian premier: we want you out. When rumours of his resignation surfaced yesterday the markets rallied. Today, as Berlusconi’s D-day approaches, the markets are in buoyant form.
Stocks in Europe have opened higher, the Borsa Italiana is up over 1%, and Italian bond yields have retreated from earlier highs of 6.74%, although they remain very elevated at approx. 6.6%. All eyes are on today’s vote in the Italian House of Representatives, and until then the markets may be fairly range-bound.
Themes:
So what does today’s vote actually mean? This is one of many challenges faced by Berlusconi. The vote today is to pass 2010 budget measures that have failed to get through once before. This vote has taken on greater significance since the weekend when Berlusconi came back from the G20 meeting in Cannes with the IMF, who have set up camp in Rome to check up on Italy’s fiscal progress.
If Berlusconi loses the vote, and there is a good chance he will after the opposition said they would abstain from the vote and some members of his coalition have defected, then he will face a test of no-confidence. Even if he wins the vote Berlusconi may call his own no-confidence vote to try and force elections with the ultimate aim being that the public (and the world) will soon see that the opposition won’t be the panacea they seem to think they will be.
So although all eyes are on this morning’s vote, Italy’s political turmoil could drag on for some time. Even if the government falls today and early elections are called, these may not take place until February next year. The undersecretary of defence Crosetto spoke to a local TV station this morning and said it would be hard to form a government with a majority post Berlusconi. So even if he goes the fractious nature of Italian politics will make it tough for a new government to push through the economic and fiscal reforms that the markets want. There is no neat solution to Italy’s problems but it is looking more and more likely that Berlusconi will be the latest “peripheral” leader to go.
Of course, Italy is a different kettle of fish from the bailed out nations of Europe. It hasn’t run into financial difficulties as yet: it still has a primary budget surplus so it can pay its bills and afford public sector spending for this year (unlike Greece). However, it’s the long-term EUR 2 trillion debt that’s the problem and as its borrowing costs rise this puts the country’s finances at risk.
Overall, the collapse of the Berlusconi government today could cause a relief rally in the euro, Italian debt and stocks. However, this is unlikely to last as markets realise that the opposition may not be any more effective than Berlusconi.
Europe’s banks may be higher today, but Italy’s largest bank Unicredit has scheduled a EUR7 billion stock sale for next Monday to help meet tighter capital rules that are to be enforced by June. Unicredit is a major holder of Italian debt, so this week’s sovereign and political stresses could not come at a worse time for the lender.
Greece is now firmly in the background even though it missed Monday’s deadline to form a government. It is trying to at the moment, although preferred candidate for Prime Minister Papademos is reportedly unhappy with the terms. It seems likely that Greece will get its seventh tranche of bailout funds as long as there is no further delay in forming a government. So the Athenian drama still has the potential to flare up again as Greece lies rudderless in an ocean of debt.
In the UK manufacturing production rose for the first time in three months in September; however the annual rate of growth remains fairly lacklustre.