MacroScope

Oh Silvio

By Mike Peacock
September 30, 2013

Even before the vote on his political future, Silvio Berlusconi ordered his five ministers to quit Italy’s teetering coalition government over the weekend in an attempt to force fresh elections.

With markets already alarmed at the prospect of another self-inflicted political wound – the U.S. government budget shutdown – Italian assets could take a hammering today with investors finally waking up to the potential chaos looming.

Bond yields did climb a little last week but not to the extent that suggests the worst-case scenario is anything like priced in. Italian BTP futures have plunged by well over a full point at the open and the euro is on the skids. Let’s hope everyone still believes in the European Central Bank’s euro zone backstop.

President Giorgio Napolitano – the 88-year-old on whom hopes for political stability again rest – and Prime Minister Enrico Letto are intent on avoiding early elections by forming a new coalition.

It’s possible that moderate members of Berlusconi’s centre-right grouping could be wooable – even the five ministers have issued statements expressing reservations or even outright disagreement with the decision – and there’s the unpredictable, anti-establishment Five Star movement to court as well. But time is tight.

Letta, who has a firm grip on the lower house of parliament but needs new supporters in the Senate to govern, will face a parliamentary confidence vote, probably on Wednesday.

A special Senate committee meeting on Friday is expected to vote to open proceedings that could lead to Berlusconi being thrown out of parliament by mid-October following his conviction for tax fraud, so one would guess he feels he has little to lose.
But members of his party have to weigh the fact that while no one can guess what result fresh elections will bring, the party that hastens them often suffers at the polls and latest evidence suggests public support for Berlusconi’s newly rebranded Forza Italy is waning.

A crumb of comfort is that much of the Italian austerity programme is baked in, although it has faltered as a result of the political wrangling. The failure by cabinet on Friday to agree on a vital package of budget measures to cut the deficit below the EU limit of 3 percent of gross domestic product and fund measures to halt an increase in sales tax is a case in point.
Any substantial halt or U-turn could push up borrowing costs for a country which has to borrow the thick end of half a trillion euros this year, and next into danger territory.

Slovenia’s problems may not be so acute but they are very real. Bank stress tests in November are expected to lay bare some serious holes. At least 7.5 billion euros of bad loans – equivalent to a fifth of the whole economy – are sloshing around the system. The government has not ruled out seeking a bailout from the EU but is trying hard to avoid it.

Today, it will produce its amended 2014 budget plan and Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, visits for talks with the prime minister and central bank governor. He will want to hear not just about the budget but privatization plans that have been slow to bear fruit and other structural reforms.

Austrian elections on Sunday gave pro-Europe centrist parties a wafer-thin combined majority, opening the prospect of weeks of horse trading to form a durable coalition. The far right performed strongly at the polls.

Local elections in Portugal punished the ruling Social Democrats, with the opposition Socialists easily besting them. With EU/IMF/ECB inspectors in Lisbon to look at the country’s progress under its bailout agreement, the president insisted the future of the government was not at stake regardless of the local election result.

Talking of troika visits, Greece’s international lenders called a temporary halt to their latest mission to Athens on Sunday, saying they had made good progress and expected to resume talks with the government soon.

Prime Minister Antonis Samaras has ruled out snap elections after the leader of Greece’s far-right Golden Dawn party and four more of its lawmakers were arrested but labelling the party a criminal organization could cause serious political ructions.

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