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The financial markets do not find Berlusconi amusing

Silvio Berlusconi’s shadow is stretching across the financial markets today, after word broke that the ex-premier and Italian press baron would make yet another bid to lead the heavily indebted Mediterranean nation.

Mario Monti, the Italian economist and former EU official who headed up the non-elected, technocratic government of Italy over the last year, announced his plans to resign after Berlusconi’s party withdrew needed support from the technocratic coalition. Berlusconi’s party, the PDL, cited disappointment over Italy’s stagnant economy for the decision though others see it as power play by Berlusconi, who was convicted by a court in Milan in October of tax fraud and sentenced to four years in prison. He is currently appealing.

At any rate, the financial markets are telegraphing significant unease with Berlusconi’s potential reappearance on the scene. Prices for Italian government bonds—the world’s third largest bond market—dropped, pushing yields, which move in the opposite direction of bond prices, up sharply. The yield on 10-year Italian debt is up 0.33 percentage points, to 4.80%, signaling a deterioration in confidence in the Italian government to handle its heavy debt load. The euro is down against the dollar. European and US stock markets are lower. And investors are channeling cash to the safety of US government debt, where prices are rising and yields are falling. The yield on the 10-year Treasury note is 1.60% at last glance.

The markets are leery of a replay of last winter’s palpable panic surrounding Italy that owed much to Berlusconi’s nonchalant approach dealing with the crisis. During the peak of the crisis, when Italian yields were exploding higher and raising the real prospect that Italy’s borrowing costs would be too much for the country to handle, Berlusconi famously suggested that there was little reason for concern. Italy was a wealthy country, he said, and the “restaurants are full of people.” The comments sent the markets into a tizzy and hastened Berlusconi’s exit.

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