February 27, 2013 -- Updated 1532 GMT (2332 HKT)
The Italian election has sent two implacable objects hurtling towards
each other: The political mess of Italy and the electorate's dislike of
austerity and reform, writes Louise Cooper. FULL STORY
|
ITALY AVOIDS PANIC AT BOND SALE
February 27, 2013 -- Updated 1402 GMT (2202 HKT)
Prime Minister Silvio Berlusconi delivers a speech during a campaign rally in Rome on January 25, 2013.
STORY HIGHLIGHTS
- Brilliant minds are still trying to figure out the financial impact of Italy's election
- The lack of certainty is seen as a negative for Italy -- and the eurozone
- Instability could reignite the eurozone crisis
- But it depends on what deal will be done, and how the markets will respond
Editor's note: Louise
Cooper is a financial blogger and commentator who regularly appears on
television, radio and in print. She started her career at Goldman Sachs
as a European equity institutional sales person and then become a
financial and business journalist. She now writes CooperCity.
London (CNN) -- Brilliant minds across the financial world are still trying to work out the implications of the Italian election result.
For the time being, the
best answer is that it is probably too soon to tell. After Tuesday's
falls, a little stability has returned to markets, possibly because
everyone is still trying to work out what to think.
Credit ratings agency
Moody's has warned the election result is negative for Italy -- and also
negative for other indebted eurozone states. It fears political
uncertainty will continue and warns of a "deterioration in the country's
economic prospects or difficulties in implementing reform," the agency
said.
For the rest of the
eurozone, the result risks "reigniting the euro debt crisis." Madrid
must be looking to Italy with trepidation. If investors decide that
Italy is looking risky again and back off from buying its debt, then
Spain will be drawn into the firing line too.
Louise Cooper, of Cooper City
Standard & Poor's
stated that Italy's rating was not immediately affected by the election
but I think the key part of that sentence is "not immediately."
At the same time Herman
Van Rompuy's tweets give an indication of the view from Brussels: "We
must respect the outcome of democratic elections in Italy," his feed
noted.
Really? That's a first. The democratically elected Silvio Berlusconi was
forced out when he failed to follow through with austerity after the
European Central Bank helped Italy by buying its debt in autumn 2011.
The clown prince of Italian politics
"It is now up to Italian
political leaders to assume responsibility, compromise and form a stable
government," Van Rompuy tweeted.
Election leaves Italy deadlocked
Did he see the results?
The newcomer and anti-establishment comedian Beppe Grillo refuses to do a
deal and yet he is the natural kingmaker, polling at 25%.
Italy's first hung parliament?
"Nor for Italy is there a real alternative to continuing fiscal consolidations and reforms," he continued.
Economically yes, but the Italian electorate disagree. And for the time being, Italy has a democracy (of sorts).
Finally: "I am confident that Italy will remain a stable member of the eurozone."
He hopes...
The key to whether the
crisis reignites is whether investors begin to back away from lending to
Italy. If so, this will be the big test of the ECB's resolve to save
the euro.
The key thing to look at
is Italian bonds, because if borrowing costs rise from 4.8% for 10-year
money currently to nearer 6%, then Italy will start to find it too
expensive to borrow.
The trillion euro
question is if the ECB will step in to help even if it cannot get the
reforms and austerity it demands (because of the political situation).
That is the crux of the matter. And there will be many in the city today
pondering that question.
Clearly in financial
markets, taking on a central bank is a dangerous thing to do. Soros may
have broken the Bank of England on Black Wednesday 1992, making billions
by forcing sterling out of the EMU, but that was a long time ago.
What we have learnt from
this crisis is not to "fight the Fed" (or the ECB). Last summer, the
ECB's chief Mario Draghi put a line in the sand with his "whatever it
takes" (to save the euro) speech.
But as part of that
commitment he stressed time and time again that any new help from the
ECB comes with conditions attached. And those conditions are what have
proven so unpalatable to the Italians -- austerity and reform.
So we have two
implacable objects hurtling towards each other. The political mess of
Italy and the electorate's dislike of austerity and reform (incumbent
technocrat Mario Monti only polled 10%).
So what happens next?
The status quo can continue if Italian borrowing costs do not rise from
here and therefore Italy does not need ECB help.
If markets continue to
believe in Draghi and Brussels that the euro is "irreversible," then
investors will continue to lend to Italy. Yes, markets will be jittery
and fearful, but Italy will eventually sort itself out politically.
The big advantage for
Italy is although it has a lot of debt, it is not creating debt quickly
(like Greece, Spain or even the UK). And as I said yesterday on my CooperCity blog, the positive outcome from all this could be that Brussels backs off from austerity, which would be a good thing.
However, the basic rule
of finance is that high risk comes with high return. Soros took a huge
gamble against the British central bank but it reportedly made him a
billionaire overnight.
There must be a few
hedge funders looking at the Italian situation with similar greed in
their eyes. If he wants to save the euro, it is time for Mario Draghi to
put the fear of God back into such hearts.
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