Eurozone crisis live: Italian political deadlock sends markets tumbling

European shares down sharply. Confusion in Italy as analysts say new elections may be necessary. Euro trades under pressure on rising Italian and Spanish borrowing costs. Fed Chairman Ben Bernanke defends QE in his testimony to Senate…

Powered by article titled “Eurozone crisis live: Italian political deadlock sends markets tumbling” was written by Graeme Wearden (7.15am-1.45pm) and Nick Fletcher (now), for on Tuesday 26th February 2013 15.27 UTC

3.27pm GMT

It wasn’t all bad news for Italy’s technocrat prime minister Mario Monti, whose poor performance in the election is a bit of an embarrassment and a slapdown of his austerity reforms. It appears he didn’t fail everywhere:

Updated at 3.27pm GMT

3.09pm GMT

Fed chairman Bernanke defends bond buying programme

US Federal Reserve chairman Ben Bernanke has strongly defended the central bank’s bond buying programme in testimony to the Senate.

He said the benefits of the stimulus outweighed the possible costs. He said the Fed was aware of the public losing confidence it its ability to unwind its programme smoothly or the possible destabilising effects of low interest rates. But he said these risks did not seem material at the moment. He said:

To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation.

But he urged politicians to avoid the spending cuts due to come into force at the end of the week, which he warned could combine with earlier tax rises to create a “significant headwind” for the economic recovery.

Markets have greeted his dovish tone on the quantitative easing programme positively, concluding it means the prospect of further easing.

The testimony followed some positive data, with positive new homes sales, growing consumer confidence and an unexpected jump in the Richmond Fed manufacturing survey.

Updated at 3.11pm GMT

2.59pm GMT

US markets open higher

US markets, which fell sharply on Monday after the impasse in Italy became clearer, are recovering ahead of a testimony before the Senate by Federal Reserve chairman Ben Bernanke.

The Dow Jones Industrial Average is up almost 100 points in early trading, but this has done little to help European markets, which are still firmly in the red.

• The FTSE 100 is down 1.11% or 70.52 points

• Italy’s FTSE MIB is 3.84% lower

• Germany’s Dax is down 1.41% and France’s Cac 1.63%

• Italy’s borrowing costs are still higher, up to 4.82% from 4.37% last night

2.48pm GMT

Ireland close to €300m savings on public pay bill

While Italy struggles to elect a government the Irish Coalition seems to be on the verge of saving €300m of its public pay bill as the Republic continues to be the ‘poster child’ for the EU, writes Henry McDonald in Dublin.

Agreement on a national wages and pension agreement in the public sector still hinges on unions accepting the deal. They are balloting their members over the weekend.

But the politician heading up the negotiations, the Labour Minister Brendan Howlin promised today that this will be the “last ask” from the government to the unions in terms of accepting austerity measures.

Speaking outside Government Buildings in central Dublin today, Howlin directly appealed to the unions to endorse the agreement: “I have said to public servants that this is the last ask. If you consider this, swallow hard as I know it’s not easy and vote for this, we will not be coming back again and we can plan our recovery over the next three years.”

Cuts to wages include a ten per cent reduction for any civil servant earning €185,000 or more. To demonstrate solidarity with public servants, the Cabinet are also taking pay cuts.

Taoiseach Enda Kenny will see his €200,000 salary reduced to €185,350, while Irish Deputy Prime Minister and Foreign Minister Eamon Gilmore will see his €184,405 salary drop to €171,308.

2.41pm GMT

Eurogroup head Dijsselbloem calls for Italy to stick to agreements

Jeroen Dijsselbloem, the Dutch finance minister and new head of the eurogroup, has added his voice to those calling for Italy to stick to its agreements with the rest of the eurozone. He told Dutch broadcaster RTL7:

I think and I hope there is a broad understanding that there is also a responsibility for the stability of the eurozone as a whole, and that agreements have to be met.

Pulling Europe from the economic doldrums requires a stable, political policy, also in Italy.

2.29pm GMT

Here’s a quick summary of the developments so far:

The Italian election has resulted in deadlock, with the centre-left group led by Pier Luigi Bersani winning a narrow victory in the lower house but the senate deeply split

There was a surge of support for Beppo Grillo’s Five Star Movement with voters disillusioned by austerity and the existing political parties

European stock markets are in retreat and Italy’s borrowing costs rising after the uncertain outcome

Two German politicians have said Italy must stick to its reform programme despite the surge in support for parties opposing it

The European Commission said it had heard the concerns of the people but Italy must continue to address its deficit

Analysts say unity government could still be formed but new elections may be necessary

Our latest news story on the election is here.

Updated at 2.43pm GMT

2.10pm GMT

Portuguese leaders divided over bailout

With the current political crisis in Italy, there are also disagreements elsewhere about the way forward.

In Portugal for instance, prime minister Passos Coelho has been playing down concerns about its bailout, as its creditors start another review. As reported by Reuters, he said:

We do not want more time under the adjustment programme, neither more time, nor more money. We intend to conclude the bailout programme by mid-2014 with the same financial package that has been envisaged.

But the leader of the main opposition party has said the package should be renegotiated. Socialist head Antonio Jose Seguro said:

We need more time and a delay of interest payments. There cannot be more austerity, there has to be a strategy of growth. I hope the government refuses proposals (by the troika of lenders) for more austerity.

Seguro also said the election result in Italy was “very worrying”.

1.45pm GMT

What’s next for Italy?

Open Europe, the think tank, outlines the potential scenarios for Italy:

  • A national unity government, if Bersani, Berlusconi and Monti join forces – could be possible but may not be enough to avoid snap elections (maybe as early as next year, and after the electoral law is changed);
  • Grillo U-turns and agrees to form a coalition with Bersani’s centre-left alliance;
  • A re-run election (presumably within 3-4 months) (with a caretaker government taking temporary control)

But without a change to Italy’s convoluted system of proportional representation, a new election might not help!

Under scenarios 1 and 3, there will be a lot of pressure to change the electoral law before new elections to avoid a similar stalemate. For that, however, there needs to be a majority in both houses, meaning that we’re looking at a potential Catch-22.

Berlusconi, of course, has already said he wouldn’t want fresh elections – and other parties also appear opposed.

Here’s the likely timescale:

15 March: First seating of the Italian parliament (both chambers).

By 20 March: The speakers of both chambers should have been elected.
After 20 March: Italian President Giorgio Napolitano starts official consultations on the formation of the new government.

However, there’s another problem – Napolitano no longer has the power to dissolve parliament, because he is in the last six months of his mandate (his term finished in May).

So if a new vote is needed, there could be months of paralysis while MPs elects a new president, so that parliament could be dissolved.

Full details here.

And with that, I’m handing over to Nick Fletcher….

12.51pm GMT

Bersani press conference this afternoon

Pier Luigi Bersani, the centre-left leader who won control of the Italian lower house but not the Senate, is due to give a press conference in around three hours time (4pm GMT / 5pm CET)

12.38pm GMT

Addressing Italy’s debt problem

The European commission also warned that Italy must address its huge debt pile, in its first public comment on the election results.

Olivier Bailly, EC spokesman, told a regular press briefing in Brussels that Italy needs a government that will push for stronger economic growth and job creation.

Asked about today’s tumbling stock markets, Bailly said:

Markets are free to react the way they want. As far as the Commission is concerned, we would like to underline our full confidence in the Italian authorities in their capacity to find and establish a political majority that will continue to deliver a growth and jobs agenda, which is what Italy needs to reduce the unsustainable level of its debt.

At around €2 trillion, Italy’s public debt is expected to hit 128% of national output during 2013. But its annual deficit is relatively low, and could fall below 3% of GDP this year.

Bailly also insisted that the EC had heard the voice of Italians, and indicated some frustration with the way the election was fought (Bersani, in particular, approached the campaign rather cautiously)

Updated at 1.28pm GMT

12.10pm GMT

Another photo from the Frankfurt stock market (that’s Beppe Grillo on the TV news).

11.51am GMT

Short-selling ban

Italy’s financial regulator has responded to the heavy falls on the Milan stock market by banning people from short-selling shares in the country’s biggest bank – Intesa San Paolo.

Intesa San Paolo’s shares have already shed 10% in a volatile sell-off this morning.

Short-selling bans, which prevent speculators selling shares they don’t own – are often rolled out at times of crisis. They won’t stop investors selling out, though, and traders in Italy aren’t impressed:

Updated at 1.29pm GMT

11.37am GMT

Latest stock market prices

Europe’s financial markets are still in retreat today, led by Italy where there’s been little relief from its rout.

Spain’s stock market has also seen a rush of sellers – reflecting concern that an escalating eurozone crisis could swamp Madrid’s efforts to avoid a bailout.

Here’s a round-up of the latest major indices:

Italy’s FTSE MIB: down 745 points at 15606, -4.5%

FTSE 100: down 81 points at 6273. -1.29%

German DAX: down 149 points at 7623, – 1.9%

French CAC: down 85 points at 3636, – 2.29%

Spanish IBEX: down 227 points at 8017, -2.75%

Italian borrowing costs also remain sharply higher, after nervy bond traders drove down its bonds. 10-year Italian bonds are changing hands at a yield of 4.78% — around 0.4 percentage points higher today.

Higher yields indicate that Italy is a riskier bet – a safe call, frankly. but something of a worry given tomorrow’s big bond sale.

Robert O’Daly, Italy analyst at the Economist Intelligence Unit (EIU), comments:

With Italy looking ungovernable, the financial markets are responding as expected.

Updated at 12.19pm GMT

11.06am GMT

Germany’s foreign minister, Guido Westerwelle, has now weighed in, becoming the third German politician to argue that Italy must stick with Monti’s reform plan.

Speaking in Berlin, Westerwelle said it was important that a stable Italian government is formed quickly – one that is committed to Monti’s policies.

Given Monti’s poor show, and the way Berlusconi won support by painting himself as the alternative to German oppression, this may not be the best approach from Westerwelle:

Updated at 11.37am GMT

10.44am GMT

Italy has seen its borrowing costs jump at its auction of short-term debt this morning.

It sold €8.75bn of six-month bills, as planned, but at an interest rate of 1.237% – much higher than the 0.73% agreed at a similar sale last month.

Analysts blamed the post-election deadlock.

Italy is due to sell long-term debt tomorrow, and Christian Lenk of DZ Bank is warning that it will probably have to accept higher borrowing costs then too.

Updated at 10.51am GMT

10.34am GMT

John Hooper: the real story of Grillo’s success

Our Southern Europe editor, John Hooper, flags up that we shouldn’t simply see the Italian election result as a simple vote against austerity.

He explains that the surge in support for Beppe Grillo’s Five Star movement reflects a deeper disenchantment with Italy’s entire political system:

John writes:

Market analysts this morning are interpreting this as a vote against austerity. But that is not the whole story, and they will misunderstand (and underestimate) the result if they see if through an exclusively euro zone, macro-economic lens.

Many of Grillo’s supporters are unquestionably fed up with their economic prospects. A recent study by the Demos think tank showed they were far more likely to be (a) pessimistic about Italy’s (and Europe’s) prospects and (b) unemployed.

But while Grillo did indeed lambast the current direction of the EU and the euro zone in his campaign (decrying Mario Monti as Angela Merkel’s poodle), his Five Star Movement’s main target is Italy’s sleazy, complacent political establishment. A new government made up of pro-growth, anti-austerity ministers drawn from among the same old parties will not make the M5S go away.

What is more, the movement’s attitude to the EU is profoundly ambiguous. When I spent well over an hour with him a few weeks ago he described himself as a “convinced European”.

That meeting led to this article: Beppe Grillo: populist who could throw Italy into turmoil at general election.

John continues:

But, Grillo says, the decision on the euro is such an important one that Italy’s membership needs to be decided by the people in a referendum. The same is true of M5S’s economic approach.

Grillo himself espouses an anti-capitalism that chimes with many of the ideas of the Occupy and anti-globalism movements. But his movement’s programme actually talks about cutting the budget deficit, and with spending cuts.

Updated at 12.20pm GMT

10.17am GMT

Germany: Italy must stick to Monti’s reforms

Two German politicians have declared that Italy must stick with the reform programme which Mario Monti has put underway — despite the surge of support for parties which oppose it.

Michael Grosse-Brömer, the parliamentary floor leader of Merkel’s Christian Democrats (CDU), said this morning.

It is important that Italy has a functioning government. Monti’s reform path must be continued.

(via Reuters).

German economy minister Philipp Rösler was putting a brace face on events, saying that he could imagine a better result for the pro-reform parties.

But in a statement, Rösler insisted there was no other way:

There is no alternative to the structural reforms that are already underway and which include consolidating the budget and boosting competitiveness.

Meanwhile the German tabloid newpaper, Bild, is horrified by Beppe Grillo’s ascendancy, and the reappearance of Silvio Berlusconi.

Its headline asks: “Are they going to destroy our euro now?”

“Our” euro?

Updated at 12.20pm GMT

9.57am GMT

Heads-up: Italy is about to hold an auction of short-term bonds.

9.54am GMT

Italy’s current prime minister, Mario Monti, is about to hold talks with the governor of the Bank of Italy, Ignazio Visco, and his own finance minister, Vittorio Grilli, about the situation following the election.

Updated at 12.20pm GMT

9.38am GMT

Our Europe editor, Ian Traynor, reports that there is shock in Brussels about the Italian election result:

But in Britain one Conservative MP, the maverick Douglas Carswell, has welcomed the surge in support for Beppe Grillo, and Mario Monti’s poor showing:

9.33am GMT

Lizzy Davies: confusion in Italy

From Italy, our Rome correspondent Lizzy Davies reports that Italians have woken up to “utter confusion”

Last night the possibility of fresh elections was being mooted by some.

But the centre-left Democratic Party appeared to back away from that, and this morning Berlusconi had had his say too. Asked on Canale 5 television about another vote, the former prime minister replied in his inimitable style: “I don’t think that would be helpful in this situation because there are no political programmes that have been discussed. The only one to have put forward programmes in this campaign was me.”

As mentioned at 8.40am, Berlusconi said all parties must reflect on the result and make sacrificies “for the good of Italy”.

Lizzy reports that, with the markets sliding, the former PM reminded us of his financial views, and criticised comparisons between Italy’s borrowing costs and Germany’s.

The spread between yields on Italian and German government bonds was “an invention of two years ago” without which Italians had lived very happily for years, he explained, adding that he was not worried about the effect the result was having on the markets.

“The markets are independent and also a bit reckless,” he said. According to the Ansa news agency, he said: “Let’s be done with the spread. Let leave it.”

That spread has widened significantly today, following the fall in the value of Italian bonds (see 7.57am).

Why there is stalemate in Italy

The situation after yesterday’s elections is that the centre-left has, as expected, secured a majority in the lower house of parliament, or chamber.

But in the upper house, or Senate, it has just two seats more than the centre-right bloc led by Silvio Berlusconi’s Freedom People party.

Centre-left: 119 seats

Berlusconi’s alliance: 117 seats

Beppe Grillo’s Five Star Movement: 54 seats

Mario Monti’s centrist group: 18 seats

Thus total deadlock – as Grillo has previously said that Five Star will not work with other parties.

Updated at 9.37am GMT

9.12am GMT

What the City experts say

The Italian election results have knocked the wind right out of Europe’s austerity drive, City analysts are suggesting today. Here’s a round-up of early comment:

Kit Juckes of Société Générale:

The cognoscenti will be focusing on the fact that the Italian election was a clear anti-austerity protest by the people of the Euro Zone’s third-largest economy.

Austerity delivers an even higher debt levels as it induces perma-recession, so what’s the point?

Gary Jenkins of Swordfish Research

The election result is an embarrassment for Mario Monti, who managed to win around 10% of the vote in both houses, a triumphant return for Mr Berlusconi and a breakthrough for Beppe Grillo’s Five Star Movement. One can assume that Angela Merkel had to be served her dinner with plastic cutlery last night.

….the early indications are that Mr Grillo is still sticking to his pre-election promise that he would not enter into a coalition with either of the traditional parties. If he sticks to that line then it would appear to leave only some form of ‘Grand Coalition’ or new elections. One would imagine that the last thing that Mr Bersani would want is another set of elections because the momentum would appear to be with Mr Grillo.

Marc Ostwald of Monument Securities:

It would appear that another round of elections are inevitable [after] a victory for Mr Grillo, a resounding defeat for the establishment as represented by Berlusconi, Bersani and Monti.

Matt Basi, of CMC Markets:

Results from this weekend’s Italian election saw voters show firm opposition to austerity plans instigated by outgoing PM Mario Monti, in favour of a comedian and a tax evader with a scandal list that goes on longer than a Bunga Bunga party. Unsurprisingly, Italian treasuries are better offered this morning.

Updated at 9.22am GMT

8.51am GMT

Trading in several Italian banks was suspended as soon as the market opened, because investors were so desperate to sell, trader @finansakrobat explains:

8.40am GMT

Berlusconi hints at deal with centre-left

Political developments in Italy: Silvio Berlusconi has ruled out forming a coalition with Mario Monti, the technocratic PM who took power when Berlusconi was ousted in November 2011.

In a TV interview Berlusconi, whose centre-right coalition was narrowly defeated in the lower Italian parliament, said that all parties need to make sacrifices.

Asked if he’d be prepared to work with Pier Luigi’s centre-left Democratic Party, Berlusconi said:

Italy cannot be left ungoverned, we have to reflect.

Berlusconi conceded that the centre-left had won the battle in the lower house (last night his party had argued that the race was too close to call). He also argued that Monti’s weak performance showed that Italians would not accept his unpopular austerity measures.

Updated at 12.23pm GMT

8.29am GMT

Shares in Italy’s two biggest lenders are being hammered – Intesa San Paolo is down 10%, with UniCredit falling 8.8%.

Updated at 12.23pm GMT

8.21am GMT

There’s also a big selloff in Spain – where the IBEX index has fallen by 3%.

Updated at 8.21am GMT

8.19am GMT

Italian stock market tumbles

in Milan the Italian stock market is plunging – by much more than feared.

The FTSE MIB, made up of the biggest companies on the market, has fallen by 5% — shedding over 760 points (it took several nervous minutes before all shares were trading properly)

Yesterday afternoon the MIB actually spiked by 4% when the first exit polls emerged, suggesting a win for the centre-left coalition. The reality – a divided Senate with no clear way ahead – has sent investors fleeing.

8.11am GMT

FTSE 100 falls at start of trading

As feared, European stock markets are sliding at the start of trading.

The FTSE 100 has dived by 92 points, to nearly 1.5%, to 6262. Financial stocks are suffering, with Barclays shedding more than 5%

Here’s a chart of the biggest fallers:

The French market has been hit even harder by the chaos in Italy, down over 3%, while Germany’s DAX is down over 1%.

Updated at 8.11am GMT

8.02am GMT

Our latest news story from Italy is online here: Italy election sparks fresh fears for euro. Here’s a flavour:

Neither right nor left had an outright majority in the upper house, where the balance will be held by Beppe Grillo’s Five Star Movement (M5S). Grillo has ruled out supporting either side in his drive to sweep away Italy’s existing political parties and the cronyistic culture they support – a sentiment he appeared to reiterate after the count by insisting the M5S was not planning on “any stitch-ups, big or small” and lambasting Berlusconi’s voters for committing “a crime against the galaxy”

7.57am GMT

Italian and Spanish borrowing costs jump

Alarming moves in the bond markets too, where Italian government debt is being sold off sharply, dragging Spain down too.

The yield (or interest rate) on 10-year Italian bonds has jumped dramatically to 4.82%, from just 4.37% last night. That’s a truly dramatic move, and means traders are rushing to sell their Italian bonds.

Spanish 10-year bonds, another key benchmark, are now yielding more than 5.4%, from 5.1% last night.

It’s a picture we’ve seen before in the eurozone crisis, when fear grows over a peripheral country’s ability to repay their debts.

Updated at 10.31am GMT

7.49am GMT

Euro falling towards $1.30

The uncertainty in Italy has sent the euro reeling, now down by nearly 3 cents against the US dollar since the first predictions from Italy.

It just hit a low of $1.3034 – having received a thorough hoofing during Asian trading dominated by talk that the the eurozone’s economic plans were in deep trouble.

As Paul Bloxham, HSBC’s chief economist for Australia, told CNBC:

We’re now left in limbo and we don’t know what the election result means for the reform agenda and the policies Italy needs to implement. It’s not a helpful outcome at all.

Updated at 10.31am GMT

7.38am GMT

Markets expected to tumble

City traders are expecting big losses when trading begins.

IG is forecasting that the main Italian index, the FTSE MIB, will fall by over 400 points, or 2.5%. It also reckons the FTSE 100 will dive by 100 points in London.

Markets hate uncertainty, as Chris Weston, IG’s chief market strategist, explains:

We simply don’t know the state of play with Italian politics, and markets find sellers in times of instability.

The President will take centre stage now and either form a ‘grand coalition’, although this seems unlikely. It has been speculated that Mr Bersani may look to team up with Beppe Grillo’s Five Star movement (again unlikely), or ultimately fresh elections will be called down the track.

This is a story of anti-austerity and one where most hadn’t expected the anti-austerity / anti-European parties to do anywhere near as well as they have. The Italian voter has spoken out and this has thrown up political instability as perhaps the number one issue facing Europe in 2013.

7.15am GMT

Italian Senate split after shock election

Good morning. European financial markets are expected to tumble this morning after Italy’s general election left the country deadlocked

After a dramatic day in Italy, the centre-left group led by Pier Luigi Bersani has won a narrow victory in the lower house of parliament.

The Senate, though, appears to be deeply split with no party winning sufficient seats to control it.

And the really big shock for the European establishment is the success of the Five Star Movement, led by comedian Beppe Grillo. It has won more votes than any other party – a remarkable achievement, which shows deep anger in Italy against the political status quo.

But it was a bad night for Mario Monti, whose centrist pro-reform coalition was a distant fourth place – failing to win enough seats in the Senate to form a coalition with Bersani.

There is talk that a second election will be needed to break the deadlock, unless political leaders can somehow agree a workable coalition.

The euro has already fallen sharply in overnight trading, and traders are braced for a big sell-off when European stock markets open in one hour’s time.

Just when when politicians and financial markets have grown confident (some might say complacent) that the worst was over, the eurozone debt crisis has flared back into life.

We’ll be tracking all the developments through the day …

Updated at 10.30am GMT © Guardian News & Media Limited 2010

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