Italys main stock exchange took a beating on Monday as investors feared the re-election of Silvio Berlusconi, amid domestic strife.
On Monday, FTSE MIB lost 4.5% of its value, edging up 0.4% by Tuesday afternoon.
The coalition of election front-runner Pier Luigi Bersani lost its eight-point lead in the polls after the news that Italys third largest lender and the countrys oldest bank Banca Monte dei Paschi di Siena requested another government bailout to cover losses of 720 million from three dodgy derivatives trades between 2007 and 2009.
The bank is also being scrutinized for its 9 billion purchase of Italian lender Antoneveta in 2007, when Santander had acquired the bank only a couple of months earlier for only 6.6 million. Mario Draghi, governor of the Bank of Italy at the time, has also come under fire after the agreement was settled under his watch.
Berlusconi hit back at the opposition by highlighting Bersanis close ties with the Monte dei Paschi, while promoting a populist tax agenda. As a result, the gap between Berlusconis right-wing alliance and Bersani's centre-left coalition closed to around 6% over the last week the tightest lead in the race so far highlighting that the election on February 24/25 is not as clear cut as previously thought.
While six points may be considered a comfortable lead in many countries, Italian polling has historically underestimated support for Berlusconi by around 3%, says Alex White, research analyst at JPMorgan.
This is as a result of voters feeling uncomfortable about revealing their preferences to pollsters; the effect could be even more pronounced in this election cycle [given the concerns around a Berlusconi victory], and may be worth around four points if the polls are not displaying existing bias. On that basis, we would estimate the centre-left to hold a real lead somewhere in the 1% to 3% range; well below the margin of comfort.
What the polls show is not an increase in popularity of Berlusconi, but an increase in the popularity of some of the small and obscure parties associated with his coalition, says an Italian bank analyst.
If you look at the polls in more detail, since mid December, Berlusconis popularity has only risen around 1.5%, as opposed to the 5% that the centre-right coalition has gained as a whole. The recent poll does not point to success for Berlusconi in the slightest.
If the centre-left manages to hang on in the lower house, the party should also be able to patch together a deal with Mario Monti and the centrists in the Senate, says White.
The lower house is essentially winner takes all (55% of seats to the first placed party), while the Senate uses the same system on a region by region basis," he says. "Our analysis still shows that Berlusconi is very unlikely to win control of the Senate without the kind of nationwide performance which would also hand him the Chamber, especially as regional polls show him further behind.
Berlusconi is likely to secure a powerful voice in both houses but will fail to reach a governing majority.