Italian Stocks Sink After Election as Debt Costs Surge

Italy’s stocks and bonds fell, while the cost of insuring its debt against default climbed to the highest this year, as the nation’s election deadlock reignited concern Europe’s debt crisis will deepen.

The FTSE MIB Index slid 4.9 percent at the close in Milan, the biggest drop in 10 months, as UniCredit SpA and Intesa Sanpaolo SpA, the nation’s largest banks, slumped at least 8 percent. Italy’s 10-year bond yields jumped 41 basis points to 4.89 percent. Credit-default swaps insuring Italian bonds gained 40 basis points to 290.5, the highest this year.

As results pointed to a hung parliament, Italy was headed toward a political stalemate that threatened to derail 15 months of austerity under Prime Minister Mario Monti’s technocrat government, reviving speculation the country will struggle to pay its debt. Italy, the world’s third-biggest debtor after the U.S. and Japan, is in its fourth recession since 2001.

“Given last year’s sharp economic contraction, it is not wholly unsurprising that the electorate is suspicious of the need for further reform,” Jane Foley, a senior foreign-exchange strategist at Rabobank International in London, wrote in an e-mail. “Without it, however, there is a heightened risk that investors will remain suspicious of the ability of Italy to improve competitiveness and growth potential sufficiently to allow a significant reduction in its debt pile.”

Rising Risk

The volume of shares changing hands on the FTSE MIB Index was 41 percent greater than the average of the past 30 days, according to data compiled by Bloomberg. The gauge has declined 4.4 percent this year, the worst start since 2010.

The additional yield investors demand to hold 10-year Italian bonds instead of benchmark German bunds, a measure of perceived risk, increased 51 basis points to 344 basis points.

The results showed pre-election favorite Pier Luigi Bersani won the lower house with 29.5 percent, less than a half a percentage point ahead of Silvio Berlusconi, the ex-premier fighting a tax-fraud conviction. Beppe Grillo, a former comedian, got 25.6 percent, while Monti scored 10.6 percent. Bersani and his allies got 31.6 percent of votes in the Senate, compared with 30.7 percent for Berlusconi and 23.79 percent for Grillo, according to final figures from the Interior Ministry.

“Today’s Italian election is the pivotal political event for the euro zone this year, and has produced a divided government in an outcome negative for political stability,” Tina Fordham, a senior global political analyst at Citigroup Inc. in London, wrote in a report received today. “The over-performance by Grillo and under-performance by Monti are clear signals, in our view, of the anti-austerity message conveyed by voters, which will make further fiscal consolidation efforts very difficult to implement.”

Bunds Rise

Spanish and Portuguese bonds also slid, while German bunds advanced for a fourth day. The euro fell 0.2 percent to $1.3044 at 5:10 p.m. in London. Italy sold 8.75 billion euros ($11.5 billion) of six-month bills today at the highest yield since October.

Berlusconi and Grillo, the candidates running to reverse the austerity implemented by Monti to contain the region’s financial crisis, scored about 55 percent of the popular vote. The result may lead President Giorgio Napolitano to install an interim government to write a new election law as the prelude to another vote.

Berlusconi acknowledged Bersani’s narrow victory in the lower house of Parliament and said he’s open to a broad alliance to avoid a second election.

‘For Italy’

“Everyone needs to think what good can be done for Italy and this will take some time,” Berlusconi said in an interview with Canale 5, a station owned by his Mediaset SpA broadcaster. The country can’t be left without a government, he said.

The Italian market regulator, Consob, said it’s considering measures to reduce volatility, including a possible short-selling ban for stocks that move outside pre-set trading bands.

Italian banks tumbled, with UniCredit, the nation’s biggest lender, sliding 8.5 percent to 3.83 euros, and Intesa Sanpaolo, the second-largest, falling 9.1 percent to 1.23 euros. Banca Popolare di Milano Scarl slumped 5.7 percent to 52 euro cents.

The FTSE Italia All-Share Banks Index dropped 8.4 percent, the biggest decline since August. Assicurazioni Generali SpA, the country’s largest insurer, fell 6.5 percent to 12.01 euros, the lowest since October.

Mediolanum SpA, the Italian financial-services company partly owned by Berlusconi, plunged 10 percent to 4.12 euros. Mediaset sank 5.6 percent to 1.62 euros.

Telecom Italia

Telecom Italia dropped 7.3 percent to 55 euro cents, reaching the lowest price since 1997. Enel SpA, Italy’s biggest utility, and Eni SpA, the nation’s largest oil company, declined 5.8 percent to 2.71 euros and 3 percent to 17.01 euros, respectively.

Pomellato SpA, an Italian jeweler, said plans to sell shares in an initial public offering as soon as next year to fund expansion are on hold after the election result.

“It forces us to look into alternative courses of action, you have to look at other sources of capital,” Chief Executive Officer Andrea Morante said today on Bloomberg Television’s “The Pulse” with Francine Lacqua. “There was wishful thinking that these elections could bring about stability in the political outlook, that wishful thinking has been proven wrong.”

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