* PM Monti to resign after 2013 budget law voted
* Italy general elections now likely in February
* Berlusconi to run as centre-right candidate
By Silvia Aloisi
MILAN, Dec 9 Prospects of a political crisis in
Italy sooner than expected - after Prime Minister Mario Monti
said he intends to resign early - are expected to drive up
Rome's borrowing costs and tensions in the euro zone after
months of calm on the bond market.
Monti's surprise announcement on Saturday that he intended to
resign after the approval of next year's budget raised the
prospect of an election in February, weeks before the end of his
term in April, and heightened the uncertainty over who will
Bankers and analysts say the biggest political risk is that
former Prime Minister Silvio Berlusconi could tap into growing
disenchantment with the structural reforms championed by Monti
to make a comeback.
"The key concern among investors is not the early elections
but the outcome of such an electoral contest," said Wolfango
Piccoli, head of Europe practice at global political risk
research firm Eurasia Group.
"A fragmented parliament is likely to emerge, leading to the
creation of a patched-up coalition government whose ability to
push ahead with the required structural reforms will be severely
limited," he added.
Berlusconi, whose withdrawal of support for the government
last week triggered the crisis, has already announced he will
run on a platform attacking Monti's austerity measures, which he
accused of plunging Italy into a recessive spiral.
"Markets will certainly not like Berlusconi's latest move," a
senior Italian banker said on condition of anonymity. "A
Berlusconi comeback would be a disaster for Italy's finances and
for the real economy."
Berlusconi's centre-right PDL party lags the centre-left PD
by at least 16 percentage points in opinion polls and also
trails the anti-establishment 5-Star Movement led by comedian
Beppe Grillo, which has won popularity by banking on public
anger against the mainstream political class.
But the media tycoon has in the past confounded pollsters and
is likely to use an anti-euro, populist rhetoric to win back
support and make it harder for the centre-left to win a clear
Even before Monti's resignation announcement, the
government's stand-off with the PDL pushed the premium that
investors demand for Italian 10-year bonds on Friday to 323
basis points over equivalent German Bunds. That is still well
off a peak of 553 points at the height of the crisis last year.
Another senior Italian banker said he expected the spread to
shoot up by 80 to 150 basis points on Monday on 10-year Italian
versus German bonds.
If spreads were to rise back to the peak level seen last
year, Italy would have to pay an estimated 45 billion euros ($58
billion) of additional interest on its 2 trillion euro public
debt, not to mention the higher cost of financing for companies
and lenders, bankers say.
"Italy needs a comeback from Berlusconi like it needs a hole
in the head," said Nicholas Spiro of Spiro Sovereign Strategy.
"The biggest domestic threat to Italy right now is populism."
Analysts said markets, where sentiment has been boosted in
recent months by the European Central Bank's pledge to buy bonds
of weaker euro zone countries, had assumed that a post-Monti
government would continue with his economic policies.
But they said that should not be taken for granted.
Even if centre-left leader Pierluigi Bersani wins the
elections as expected, he may not have a strong enough majority
to push through the kind of unpopular reforms Italy needs.
Ratings agency Standard & Poor's warned of significant risk
that Italy's recession-hit economy would not recover in the
second half of 2013 and said there was uncertainty around
whether the next government coalition would remain committed to
the structural reform agenda pursued by Monti.
While Italy, the euro zone's largest sovereign debtor, is
within spitting distance of meeting its 2012 funding needs, it
has around 420 billion euros to refinance next year.
A prolonged rise in its bond yields could trigger fears
about the sustainability of its debt and could unravel the
improvement in market confidence driven by the ECB bond-buying
This in turn could drag Spain, which has been dithering over
whether to request an EU bailout, back into the mire.
"I suspect Italy will face a repeat of the pressures it
faced in late-2011, when yields across its debt maturity range
rocketed to unsustainable levels," Raj Badiani of IHS Global
He and several Italian senior executives did not rule out
that another technocrat government, perhaps led again by Monti,
could be formed in the second half of 2013 or that Italy could
be forced to request help from the EU.