As night covers Europe, markets worldwide are hoping the lights stay on in Rome. A colorful figure, Italy’s Prime Minister Silvio Berlusconi holds responsibility for shepherding his country through the EU-demanded reforms, to be monitored by the IMF.
A running theme in recent market analysis commentary is the impact of political uncertainty. The very real possibility of Greece not approving the euro zone bailout plan sent markets lower last week. However, after Prime Minister Papandreou recanted his call for a referendum, the markets reacted favorably.
The Greek drama continues to unfold. Papandreou survived a confidence vote late Friday evening. Greek politicians made much progress over the weekend in forming a coalition government. The latest sticking points, however, turn on who will lead this interim government and how long it will last.
While the markets were rooting for Papandreou surviving his confidence vote, the sentiment for Berlusconi is not so strong.
Rumors of a no confidence vote later this week are rife. Today, the Italian prime minister shot down rumors of his resignation through a Facebook update. Italian reader comments ranged from support to the opposite.
Berlusconi represents Italy’s unique risk and is perhaps one reason why the yields on the country’s 10-year bonds shot up well beyond 6% at Monday’s close.
Italy’s eroding credit markets are damaging investor perception that the country can pay its debt. As Italy issues new debt to pay down old debt, investors increasingly demand higher yields.
In the world of investing, one knows that past returns cannot predict future performance. Perhaps the same cannot be said of Berlusconi. The past predicts he will hold on to power as long as possible.
After all, some five hours ago, the prime minister posted another Facebook message underscoring the need to fight a shift to an unelected government. And, besides, outside of office, his major distractions are trials for various charges against him.
Italy’s biggest banks — Unicredit (UNCFF, quote) and Intesa (ISNPY, quote) — gained some ground today in relief, as did the broad Italian ETF (EWI, quote).
Tomorrow, however, a budget vote in Parliament tomorrow will test whether Mr. Berlusconi still holds a majority of support. If he does not, his term could end much sooner than he wishes. For bond traders, however, the end could not come soon enough.
From their February peaks, Unicredit and Intesa are down a harrowing 60% and 55%, respectively, while the broad Italian market is down a comparatively restrained 35% since April.
Investors should keep an eye on tomorrow’s market movements and be wary of political risk. Europe’s troubles are not over yet.