ECB Says Italy Politics Led to Outflows as Elections Looms

The European Central Bank said that political uncertainty led to a deterioration of market sentiment toward Italy in December as polls signal that the country may face the risk of a hung parliament after elections next month.

“Increased political uncertainty in Italy led to some flight-to-safety flows,” the Frankfurt-based ECB said in its monthly bulletin published today. At the same time, “between the end of November 2012 and 9 January 2013, yields on AAA-rated long-term euro area government bonds remained close to their historic lows.”

On Dec. 10 Italian government bonds slumped, pushing 10-year yields up by the most since August, after Prime Minister Mario Monti said he would resign after his predecessor Silvio Berlusconi withdrew his party’s support to the government. Monti resigned on Dec. 21 after the parliament approved the budget law, paving the way for early elections. Monti is heading a centrist coalition in the campaign while acting as a caretaker premier.

Polls ahead of the Feb. 24-25 ballot suggest that the coalition headed by the Democratic Party will win a majority in the Chamber of Deputies, while falling short in the Senate. Such an outcome could require it to reach out to Monti’s bloc for the needed support to govern.

The premier’s presence in the election campaign and the possibility that he’ll have some influence over the next government has helped Italian bonds recover from the post-resignation slump.

The country’s 10-year yields fell 3 basis points today, or 0.02 percentage point, to 4.15 percent at 2:30 p.m. in Rome. That is down 67 basis points from the 4.82 percent close the day after Monti resigned.

Public support for the group led by the Democratic Party’s head Pierluigi Bersani slipped to 37.4 percent from 40.3 percent in December, according to a Jan. 14 poll by the EMG institute. The bloc led by Berlusconi rose to 27.9 percent from 25.3 percent, while Monti and his allies gained to 14.8 percent from 9.9 percent a month ago.

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