we commented on the Italian election – rather unfairly pinning the blame for Italy’s equity losses on Mr Berlusconi alone (will nobody give poor Silvio a break)?
Initially it was exit polls suggesting a Berlusconi victory that knocked the first 4% off Italian shares, but Tuesday morning’s losses were about the uncertainty that had been created. It now seems very challenging for Italy to form a government. If it can do so, that government will struggle to pass legislation and will be vulnerable to a vote of no confidence on an almost daily basis. If it cannot then there will be a couple of months of power void before a new election, the outcome of which is highly uncertain.
In that context Italy auctioned €2.5bn of five year bonds and €4.5bn of ten year bonds this morning (i.e. it borrowed €7bn from bond investors). The five year bonds were auctioned at a rate of 3.59% and the ten year bonds at a rate of 4.83% per year. Last time Italy borrowed money the equivalent rates were 2.94% and 4.17%. The net result is that Italy’s borrowing costs have just risen by €350m. That pails into insignificance relative to the €15bn wiped off Italian shares between the pro-Berlusconi exit poll and the eventual stabilisation of the equity market. But falling equity values only crystallise losses for the sellers and otherwise might be perceived as being suffered by companies (although employees and pension funds bring this pain back to the masses), whereas these borrowing costs will need to be met by ordinary Italians through further tax and spending cuts.
What price a vote against austerity? The price is probably more austerity.
Head of Portfolio Strategy