Italian Stocks Plunge, Dragging European Markets Lower

Prime Minister Mario Monti
Prime Minister Mario Monti’s non-elected government has raised taxes, cut spending and overhauled the pension system and labor laws in a bid to tame finances and fend off fallout from the region’s debt crisis. Photographer: Alessia Pierdomenico/Bloomberg

Italian stocks and bonds plunged, dragging European markets lower, after Prime Minister Mario Monti said he would resign after losing the support of former Premier Silvio Berlusconi.

The benchmark FTSE MIB index fell 3.3 percent to 15,178, eclipsing declines among the major European indexes and dragging the Euro Stoxx 50 down by 1.1 percent at 11:23 a.m. in Milan. The yield on the country’s benchmark 10-year bond rose 28 basis points to 4.81 percent, the biggest one-day gain since Aug. 2.

The declines came after Monti announced Dec. 8 that he plans to resign as soon as his budget plan is passed by Parliament. Berlusconi’s People of Liberty said last week it would no longer back Monti’s year-old government. The PDL, as the party is known, will allow the budget to be passed and a vote is due before the end of the year.

“An increase in anti-austerity and anti-reform rhetoric is to be expected, and this will likely result in an increase of the risk premium associated with Italian assets,” Goldman Sachs Group Inc.’s London-based strategists Francesco Garzarelli and Silvia Ardagna wrote in a note to investors yesterday.

Crisis Fallout

Monti’s non-elected government has raised taxes, cut spending and overhauled the pension system and labor laws in a bid to tame finances and fend off fallout from the region’s debt crisis. The country’s 10-year bond yield had fallen about 200 basis points under Monti as he restored investor confidence.

The jump in the 10-year yield pushed the difference with German bunds up 30 basis points to 352 basis points, the highest since Nov. 19. Among equities, Italian banks were the hardest hit with Banca Monte dei Paschi di Siena SpA, losing 7 percent, Banco Popolare falling 7.2 percent. UniCredit SpA, the nation’s biggest lender, lost 6 percent to 3.43 euros.

Berlusconi is already campaigning against the government he supported since his resignation 13 months ago when Italy’s 10-year yield topped 7 percent. He is calling for lower taxes and an easing of austerity, a populist message that threatens to rattle the election campaign.

Monti’s austerity measures have deepened the country’s recession, which is now in its second year. Unemployment has risen to a 13-year high of 11 percent and industrial output slumped 1.1 percent in October, the national statistics institute said today.

Election Date

With Monti’s resignation likely before year end, elections could be held as soon as mid-February. Currently the Democratic Party leads in opinion polls, with about 30 percent support compared with just 13.8 percent for Berlusconi’s PDL, according to a Dec. 7 survey by SWG Institute. Still, Berlusconi is already trying to rebuild his previous alliance with the Northern League party and his populist message may peel some voters away from Beppe Grillo, the former comic turned politician, whose anti-austerity Five Star Movement is polling at 19.7 percent, according to SWG.

“The political situation in Italy may temper” investor confidence, Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in e-mailed comments. “The prospect of an election next year being fought on the issue of fiscal policy will be unsettling.”

The rattling of the markets comes days before Italy sells debt. The Treasury auctions 6.5 billion euros of one-year bills on Dec. 12 followed the next day by the sale of three longer-maturity securities.

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