Political crisis costs high for Italy budget

MILAN - Reuters

A TV screen showing news on Italy’s former Prime Minister Silvio Berlusconi is pictured at the German stock exchange. REUTERS photo

Italy pays the price for its latest political crisis with higher borrowing costs yesterday as it sold longer-dated bonds to investors worried about an inconclusive election.

The vote cast over the weekend gave none of the political parties a parliamentary majority, raising the risk of prolonged instability and a rekindling the euro zone crisis.The results, notably the dramatic surge of the anti-establishment 5-Star Movement of comic Beppe Grillo, left the centre-left bloc with a majority in the lower house but without the numbers to control the upper chamber.

“Markets have been underpricing Italian political risk for months and are now struggling to come to terms with an extremely unstable and fluid political situation,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

The political stalemate could halt reforms needed to spur growth and help Italy cut its massive 2 trillion euro debt pile.

As stunned parties look for a way forward after the messy result, the treasury will seek to sell between 3 billion and 4 billion euros of a new 10-year bond and between 1.75 and 2.5 billion euros of five-year paper.

The sale comes in a challenging environment as the outcome of a six-month bill sale and a sell-off on
secondary market showed on Feb. 26.

“Italy’s debt market is facing its most serious challenge since the announcement of the European Central Bank’s bond-buying programme last summer,” said Spiro.

After Tuesday’s sell-off, the 10-year debt costs could rise towards 5 percent at Wednesday’s sale, coming back to a level not seen since the end-September issue, analysts said.

“We have seen what could happen if political instability continues...I believe markets will not give politicians any breathing space,” said Valerio De Molli, managing director of consulting firm The European House-Ambrosetti.

The risk is that the political stalemate may reverse a cautious comeback of foreign investors into Italy’s debt that started after by the ECB’s bond-buying pledge.

“If political parties are not able to give in the short term a strong signal of change, foreign banks could reduce their activity in the country,” Guido Rosa, head of the Italian association of foreign lenders, told Reuters. The treasury had taken advantage of a benign environment at the beginning of this year to cover more than 20 percent of its total 2013 refunding needs.

Bad news from Moody’s

Moody’s Investors Service said Italy’s inconclusive election outcome is credit negative because it raises the possibility of new elections, prolonging the country’s political uncertainty.“We would consider downgrading Italy’s government debt rating in the event of additional material deterioration in the country’s economic prospects or difficulties in implementing reform,” Moody’s said.