Italys government stability indicator fell by 0.1 points to 4.9 (out of 10) this week, after analysts re-assessment of Italys risk profile. The countrys transparency and industrial relations indicators have also seen reduced scores.
Such a scenario could easily offset any ground made to the countrys debt restructuring and could hinder the ability of the EUs institutions to effectively contain the eurozone debt crisis, if the coalition follows through in opposing austerity measures and German-backed fiscal stabilization measures.
Italy is approaching the elections with an uncertain outcome, says Giovanni Oliveri, economist at UniCredit and a member of ECRs expert panel of economists. Not only is it difficult to predict which coalition will win, but if the winning coalition will be able to form a government that has the support of both houses of parliament.
Meanwhile, corruption continues to weigh heavily on Italys risk profile. The countrys corruption indicator remains the lowest political sub-factor score in absolute terms just 4.4 out of 10.
Italys score decline this week came as a new crisis emerged on the EUs doorstep. Eurozone stocks plummeted and yields soared on Spanish and Italian 10-year bonds, after slush-fund allegations embroiled Spains prime minister Mariano Rajoy and his party.
Meanwhile, Italian 10-year bond yields soared by 14 basis points to 4.47%. The higher risk associated with Italian 10-year paper followed the eruption of a banking scandal at Banca Monte dei Paschi, which saw presidential candidate and former premier Silvio Berlusconi jumping up the election polls on the back of public anger.
Berlusconi closed the gap on front-runner candidate Pier Luigi Bersani to 5%. Berlusconis centre-right People of Liberty (PDL) party has openly opposed austerity measures and German-backed fiscal stabilization measures.
Francesca Panelli, one of ECRs analyst and economist at Banca Aletti, is concerned about how the markets will react to the election outcome. In Italy, I can see a growing risk of un-governability, with two different majorities in the two houses, says Francesca. This could be very dangerous for markets and could be a catalyst for uncertainty.
The events show that politics is clearly back on markets radar. Italian and Spanish politics are two of a number of issues which we have consistently argued have the capacity to unsettle markets recent stoicism over the eurozone, says Nomura in a recent report.
Political developments in both countries will therefore be followed more closely by markets in the coming days and weeks, with, history suggests, negative news from one likely to spill over into the other.
This article was originally published by Euromoney Country Risk. To find out more: register for a free trial at www.euromoneycountryrisk.com