Italian bonds and stocks fell as investors grew increasingly nervous over the durability of the country’s fragile coalition government.
The FTSE MIB index of Italy’s listed companies hit a two-year high earlier this week on rising optimism over the eurozone’s tentative economic crisis. But it has tumbled over the past two days as former premier Silvio Berlusconi’s allies threatened to break away from the ruling coalition.
Italy’s benchmark 10-year bond yield, which moves inversely to price, rose for a second day to 4.42 per cent, despite a generally good day for the rest of Europe’s bond markets.
“The stream of news that is coming across my screen makes me think that this has the potential to get much worse – against the backdrop of a weak Italian and European economy,” said Andrew Milligan, head of global strategy at Standard Life Investments.
“Further action to reduce the fiscal deficit would be incredibly difficult if the government has to fight for its survival.”
The political jitters pushed up Rome’s borrowing costs at an auction of €3bn of bonds due in 2024 to an average yield of 4.5 per cent, up from 4.46 per cent at the last auction in August.
Italy also auctioned €3bn of bonds due in 2018 at the same cost as last month, but analysts were on the whole unimpressed by the debt sale.
“The auction was received with relative tepid demand due to political uncertainties that seem to have prevailed and offset the relative supportive factors due to pre-auction concession,” Annalisa Piazza, a strategist at Newedge, said in a note.
Enrico Letta, the Italian prime minister, was meeting president Giorgio Napolitano to discuss the government’s prospects after the parliamentarians from People of Liberty, the party led by Mr Berlusconi, threatened to resign en masse if the former prime minister was ousted from the senate after a conviction for tax fraud.
The threat casts a cloud over the tentative calm that has reigned over Italy’s financial markets since last summer, when Mario Draghi, the European Central Bank president, reassured investors that he would do “whatever it takes” to keep the currency bloc intact.
Mr Letta has been forced to return to Rome from the US, where the premier had rung the opening bell of the New York Stock Exchange and attempted to assure investors that Italy was “young, virtuous and credible”.
But some investors are concerned that Italy’s inability to form a stable government could lead to a downgrade of its credit rating.
Standard & Poor’s relegated Italy to two notches above junk in July, and warned that further downgrades could be warranted if Italy could not show “institutional and governance effectiveness”.
A downgrade could make it more expensive for Italy to service its €2tn of government debt and budget deficit, despite the calm engendered by Mr Draghi’s promise.