Markets fall on Italian political uncertainty, euro holds ground

Italian PM Mario Monti's announcement that he plans to resign from his post after the budget is passed stirred the markets on Monday. Heightened political uncertainty in Italy caused by Monti's decision resulted in a spike in the country's benchmark 10-year bond by 36bps to 4.89% and it is weighing on other peripheral nations' yields.

European stocks were seen falling on Monday on the renewed concerns with the situation in Italy and the possibility of it aggravating the Eurozone debt crisis. The euro however remained almost unaffected in the 1.2900 area after falling to the intraday low of 1.2885.

According to the Capital Economics team of analysts: “The intended resignation of Italian technocrat Prime Minister Mario Monti is a timely reminder that the euro-zone debt crisis still goes way beyond the problems of Greece.”

“The knock-on upward effect on Spanish yields seen today suggests that renewed worries over Italy could limit the effectiveness of OMTs even for Spain. As such, we stick to our long-held view that Italy will need to undertake a substantial debt restructuring (i.e. default) at some point if it is ever to return its public debt to a sustainable level.”

Greece extends bond buyback offer to Tuesday

The Greek government announced on Monday that the deadline for bids to repurchase Greek debt will be extended to 12:00 GMT on Tuesday.

The initial invitation for investors to submit offers to take part in the buyback ended at 17:00 GMT last Friday but due to the inability to reach the expected 30 billion euros in bonds tendered it was decided to extend the deadline by one more day.

Public Debt Management Agency chief Stelios Papadopoulos urged investors to take advantage of this possibility as “future measures may not involve an opportunity to exit investments (Greek sovereign bonds) at the levels offered for this buyback.”

Italian PM Monti announces intention to resign; early elections likely in February

The political news coming from Italy, in which current primer minister Mario Monti plans to resign once the 2013 budget goes through parliament and is approved, are not sitting well with the Euro, as investors anticipate it may lead to a new chapter in the EU crisis. The prospects of higher Italian bond yields when Europe opens weighs on the Euro.

The Italian general elections, upon final confirmation, will likely be celebrated in February. Former primer minister Silvio Berlusconi is to run as centre-right candidate, and with the threat of an 'Il Cavaliere'-led anti-euro campaign looming, traders have logically turned cautious. The leading centre-left PD party is still in control, with Berlusconi's centre-right PDL behind by over 16 points.

According to NAB: "Prospects of Italian bond yields spiking higher when Europe opens is driving the euro lower. EUR bears would though do well to note that the People of Liberty party currently trails the centre-left Democratic party by 20% points. Plus, the re-appearance of Mr Berlusconi to the centre of the Italian political stage may well prompt Mr Monti to make him himself available for re-selection as PM after elections now seen likely to occur next February, three months earlier than originally intended."

At this stage, reservations to bid the Euro are high as the mere thought of a Berlusconi comeback would be destructive for the austeritarian path taken by Italy under Monti's technocrat supervision, posing a real threat in worsening the country's finances. The possible electoral results remain uncertain, although most early comments are anticipating a divided parliament, which may inevitable lead to a coalition government lacking determination to implement key structural reforms.

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