| MILAN, Sept 30
MILAN, Sept 30 Italian government bonds and
shares dived on Monday after Silvio Berlusconi pulled the rug
from under Enrico Letta's coalition government by ordering five
centre-right ministers to quit.
Berlusconi's decision, which comes as the media tycoon is
facing eviction from parliament after a tax fraud conviction,
has left the euro zone's third-largest economy without a
Investors fear Italy's political chaos may ripple beyond the
country's borders, particularly if new elections result, even
though President Giorgio Napolitano appears determined to try
all avenues to seek a new parliamentary majority.
The turmoil comes at a doubly unfortunate time as next
year's budget law is under negotiations, although the fact that
the euro zone economy is showing signs of recovery and investors
continue to believe in the European Central Bank's backstop
could limit any contagion.
"If it were to come to new elections, still a big if, the
ensuing political uncertainty would be bad for Italy and, to a
lesser degree for the euro zone," said Holger Schmieding,
economist at Berenberg Bank. "But markets and euro zone
policymakers are now probably in a better position to deal with
it than before."
The yields on Italy's 10-year bond, a good indicator of
long-term sentiment towards Italy, spiked to 4.73 percent early
on Monday from 4.42 percent on Friday, the highest since June
but well below a 7.5 percent yield hit when Italy came on the
verge of default in late 2011.
Shares in Milan's blue-chip FTSE MIB plunged 2.5
percent minutes after opening, with banking stocks particularly
heavy. Shares in broadcasting group Mediaset, controlled
by Silvio Berlusconi, were down nearly 5 percent.
Italian Prime Minister Enrico Letta will go before
parliament on Wednesday and hold a confidence vote to verify
what is left of his parliamentary backing.
The outcome of a confidence vote is uncertain as some of
Berlusconi's lawmakers from his centre-right party have shown
increasing unease over his shock decision to withdraw government
support. Minister Gaetano Quagliarello told an Italian newspaper
on Monday there was talk to form another centre-right party.
"The resignation of the centre-right ministers will clearly
increase volatility in the government bond market, similar to
what happened between February and April, before the current
government was formed," Goldman Sachs analysts said, adding the
crisis threatened the few reforms Letta's coalition was trying
to push through.
Letta enjoys a commanding majority in the lower house but
would need to win over a couple of dozen senators from
Berlusconi's PDL party or opposition parties including the
anti-establishment 5-Star Movement to be able to be sure of
"Markets have grown accustomed to Italy's dysfunctional
politics, but there's a sense that things are now spinning out
of control," said Nicholas Spiro, who runs specialised
consultancy Spiro Sovereign Strategy.