Italian Election Means New Stress For Eurozone
"The uncertainty is significant, not just how the election will pan out, but how the government will turn out and what the debate is going to be like," said analyst Raoul Ruparel at the Open Europe think tank in London.
"And that's not something markets like. You add in the Greek uncertainty and Spanish uncertainty on top of that... and that's a worrying confluence of factors for a pretty fragile eurozone at the moment. "
The risk from Saturday's announcement is that heavily indebted Italy, the eurozone's third-largest economy after Germany and France, will now slow down or halt efforts to shake up its economy. The country's debt stands at 126 percent of its annual gross domestic product of â¿¬1.6 trillion ($2.1 trillion).
After passing a 2013 budget, the Italian parliament will likely pass little in the way of new measures for several months. And Italy could come out of new elections â¿¿ expected in February â¿¿ with no party clearly in control.Meanwhile, the election campaign could see Berlusconi shake market confidence by campaigning on an anti-cuts platform. His party lags in the polls, however, and some analysts think a new government could be led by center-left candidate Pier Luigi Bersani, who has vowed to keep Italy's commitments to its EU partners. Europe's crisis over too much debt was calmed when European Central Bank head Mario Draghi said in July that the bank would "do what it takes" to rescue the euro. He then followed up with a plan in September to buy unlimited amounts of government bonds issued by indebted countries, if they agree to reduce their deficits. The bond purchases would have to be preceded by a formal request for financial help from the European Stability Mechanism, the eurozone's bailout fund. The purchases could push bond prices up and interest rates down, since prices and rates move in opposite directions. Just the possibility that the ECB might intervene had already sent borrowing costs down for Spain and Italy.
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