Italian voters to get second chance to resolve political crisis

Italy’s political crisis sent stocks plummeting, pushed bond yields up and put pressure on the euro as its president vetoed an attempt to form a government between two incompatible populist parties.

The euro fell to its lowest level since November 2017 against the US dollar, trading at $US1.16.

A new election is likely, giving Italian voters another opportunity to elect parties suited to running a government rather than an anti-European Union protest.

The previous vote in March gave greatest support to the populist 5 Star Movement and the conservative League, both of which campaigned against the EU as the source of Italy's economic woes.

President Sergio Mattarella refused to approve these parties’ pick to head the economy ministry, Paolo Savona, an 81-year-old economist who has sharply criticised the euro and likened Berlin’s dominant role in setting eurozone economic policy to wartime aggression by Nazi Germany.

Mr Mattarella said he feared a new government with Mr Savona as economy minister could endanger Italy’s membership in the eurozone. Instead, former International Monetary Fund official Carlo Cottarelli was asked to try to form a new government until another election can be held.

Doubts about transition government
The previous election was in March when voters opted to support the 5 Star Movement and the League while rejecting mainstream pro-European parties. 

However, analysts doubt the new government has much of a future.

“It’s difficult to see Mr Cottarelli as the head of the transition government. Many parties won’t give him a confidence vote,” IG Italia market analyst Vincenzo Longo says.

Italy’s benchmark stock index, the FTSE MIB, closed down 2.1% after losing as much as 2.3% in mid-afternoon trading, helping to drag down European stocks broadly.

The Stoxx Europe 600 closed down 0.3% after losing as much as 0.7% during the day. France’s CAC 40 shed 0.6%, as did Germany’s DAX.

Markets in the US and the UK were closed for holidays.

Banks stocks worst affected
Italian banks were especially hard hit. Banco BPM lost 6.3%, setting off circuit breakers that halted trading briefly for half a dozen other banks.

The Italian 10-year government bond yield rose to 2.68% from 2.36%, while the interest-rate spread over similar German bunds widened above 2.30 percentage points, the highest since late 2013.

“We doubt that new elections are a panacea for Italy’s future stability,” says Allianz Global Investors investment strategist Ann-Katrin Petersen.

She expects bonds of nations such Portugal and Spain to remain vulnerable over the uncertainty at the heart of the eurozone. Both countries’ bonds sold off, though less than Italy’s.

The Italian economy is 5% smaller per capita than it was in 2001, compared with a per capita GDP increase of 18% across the whole of the EU.

Italy’s economic problems are mostly homegrown, with a 20-year erosion in productivity, a cumbersome bureaucracy and a dominant small-business sector that has stifled productive investment.