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Market votes on Monti’s exit and Berlusconi’s return

Italian stocks and government bonds have sold-off sharply on the double whammy of prime minister Mario Monti announcing his intention to step down and the possible return of former premier Silvio Berlusconi to front-line politics.

Italian bank shares led the sell-off in stocks on Monday, with Intesa Sanpaolo and UniCredit’s share price down between 4% and 5%, while Italy’s 10-year government bond yield rose by more than 25 basis points to about 4.8%, reversing a rally since August.  Monti announced on Saturday he intends to resign once Italy’s budget is pushed through parliament, a move provoked by Berlusconi’s PDL party withdrawing its support for Monti, which followed PDL abstaining to vote on the growth decree. The withdrawal of support left Monti’s government without a parliamentary majority.

Source: Reuters

An election in Italy is now expected during the second half of February next year, two months earlier than originally scheduled, should Monti resign around year-end, according to Erik Nielsen, global chief economist at UniCredit in London.  “In other words, the news is not the election, but the way it’ll come about, namely via what appears to me as a gamble by Berlusconi and his party,” Nielsen wrote in a note to clients. “And a gamble it is. PDL is in disarray and is polling at around 15%, regardless of whether Berlusconi runs or not.”

However, with public support for his policies at around 47%, Monti carries considerable power going into the election, should he choose to use it, argues Nielsen. 

“Indeed, all the major Italian newspapers report ... that Monti now has free hands and may seriously consider positioning himself ahead of the election as head of a party or movement that brings together moderate and reform-oriented people who find it difficult to have appropriate representation in the current party set up,” Nielsen wrote.

He sees two possible outcomes at this time for the next Italian government: a coalition led by Pier Luigi Bersani, head of Italy’s Democratic Party – possibly with Monti as president – or a continued Monti-led technocrat government.

“We know Monti but from the perspective of international investors, it is worth noting that, so far, I have heard nothing from the Bersani camp that would make me worry about Italian reforms or Italy’s newly reclaimed place at the table among other leading European or G7 members in the most likely alternative scenario,” wrote Nielsen. 

He added that Italian stock and bond markets will likely be volatile during the next couple of months, but beyond that he is “not seriously worried about the direction of policies in Italy – and if Monti were to take a clear stand in the election, I suspect that the rally could be back on before long”.

However, the biggest risk in the next few days is the three-year bond auction the Italian treasury plans on Thursday, the same day Spain plans to sell bonds.

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