Monti’s exit fuels surge in Italian yields in test for EU

The imminent end of Prime Minister Mario Monti’s government fueled the largest increase in Italian borrowing costs in four months and threatened to open a new front in Europe’s crisis fight before a year-end summit.

Italian 10-year bond yields jumped 27 basis points to 4.79 percent at 3:45 p.m. in Rome, widening the difference between yields on German bunds of similar maturity by 26 basis points to 349 basis points. Italy’s benchmark FTSE MIB stock index fell 2.5 percent, while Germany’s DAX Index was little changed.

Italy’s government crisis, which pits Monti against billionaire former premier Silvio Berlusconi, is roiling investors and bringing tensions among European Union leaders to the fore. EU heads of state and government, gathering in Oslo today to collect the Nobel Peace Prize, are seeking to present a united front as the resurgent Berlusconi hits the campaign trail with his German-skeptic, anti-austerity message.

“The underlying cracks within the euro zone are actually widening,” Georg Grodzki, head of credit research at Legal & General Investment Management in London, which has about $290 billion of bond funds, said in an interview yesterday. “Investors will be reading Italian politicians’ lips very, very closely.”

Test of EU

The Italian election campaign puts the EU’s budget policy up for review in the 27-country area’s fourth-largest economy. Monti, 69, said Dec. 8 he will resign due to parliamentary opposition from Berlusconi and his allies, who had previously backed the government. The unelected premier is undecided about whether to seek a second term, Italian daily La Repubblica reported today.

Under Italian rules, an election could come as soon as February. Monti will hand in his final resignation after making an attempt to muster parliamentary support for the 2013 budget law. A vote is due before the end of the year. Elections will be held 45 to 70 days after President Giorgio Napolitano dissolve parliament. In that interim period, Monti may remain premier, o Napolitano may appoint a caretaker.

Under Monti’s 13-month-old government, Italy’s 10-year bond yield has declined more than 200 basis points and the government last month sold debt at the lowest rate in two years. His austerity measures, while deepening the country’s fourth recession since 2001, have also left the nation on track to bring its deficit within the EU’s limit of 3 percent of gross domestic product this year.