european markets bombshell-Italy threatens to destabilise entire EU

express-The pan-European STOXX 600 index was down 0.2 percent by 0855 GMT following three straight days of losses while Italian banks and blue chip shares fell sharply for a second day.

Italian banking shares, already hit over the last two days, were among the losers with UniCredit down 0.9 percent. Among other euro zone bank heavyweights, Deutsche Bank fell 1.6 percent and Spain’s Caixabank dropped 1.4 percent.

The reaction came after Italy’s biggest parties announced they were considering holding an election as early as September.

It is being proposed that Italy take up a proportional representation model similar to that of Germany.

The move will play into the hands of smaller parties, including the right-wing Five Star Movement which currently is neck-a-neck with Matteo Renzi’s party – both at around 30 per cent.

Lawmakers in Italy are due to discuss the first draft of the new law early next month.

“Momentum is building among political leaders and is pushing towards early elections but it will be an uphill battle against the president and parts of the rank-and-file in the parliament,” Giovanni Orsina, a professor of government at Rome’s Luiss-Guido Carli University told Bloomberg in a phone interview.

Markets have not however reacted well to the news amid fears the election will spark a hung parliament and even further instability in the already beleaguered nation.

“We always knew Italy was going to come back into the market’s sights but I think people thought we would have a longer stay of execution,” said Rabobank currency strategist Jane Foley.

“It does seem like the market will have to face worries about elections and populism again over the summer. That of course is a drag for the euro.”

Barclays said it still expected Italy to hold elections next year, even though chances of a snap vote had risen substantially, with non-negligible risks that anti-establishment parties could win.

“We expect volatility in Italian and periphery assets to increase in coming weeks and to remain driven by electoral polls,” they said in a note.

Italian bonds have been the worst performers in Europe this week following Renzi’s comments. Since Monday the yield on Italian 10-year bonds has risen nine basis points to 2.19 percent, pushing the yield spread over German bonds to 189 basis points.

Investors including BlackRock Inc and Goldman Sachs Group Inc. have said they see Italy as the next focus of regional political risks after France

Italian president Sergio Mattarella will ultimately make the call as to whether to dissolve parliament of not.
According to Italian newspaper Corriere della Serra, Mattarella would prefer to let PM Paulo Gentiloni stay in power until next year rather than call an early election.

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