Italy’s political turbulence, which saw an incoming populist government collapse before it had taken power, has shaken markets and even reignited fears over a fresh Eurozone crisis – putting political risk firmly back in the spotlight.
A planned coalition in the country between parties Five Star Movement (M5S) and the League failed this week, after current president Sergio Mattarella refused to accept the nomination of Eurosceptic Paolo Savona for the role of finance minister.
Mattarella, who said appointing Savona would have risked the confidence of foreign investors and potentially destabilised the country, then named a new interim prime minister – triggering the prospect of more elections.
Reacting to the turmoil, markets around the world were rattled and reports have warned that Italy could now be at risk of a new financial crisis.
Italian bonds suffered their worst day since 1992 on Tuesday, with two-year bond prices falling and yields surging more than 150 basis points to 2.73%, according to reports.
On Tuesday, the euro dropped to its lowest level against the US dollar for 10 months at $1.153, and the Dow Jones was rattled as investors shifted money into US bonds. By Wednesday morning, stock markets in Asia had also dropped sharply.
“Things need to get worse before they get better,” Carsten Nickel, managing director of Europe for political risk consultancy Teneo Intelligence, told Bloomberg.
“If and when the market pressure returns, the political backdrop is much worse than it was six or seven years ago. It’ll be more difficult to muddle along.”