As 2012 closed, uncertainty in the market for Italian bonds was caused by the People of Freedom Party (PDL) - led by Silvio Berlusconi - abandoning the government of national unity, led by Mario Monti. The government had successfully constructed and delivered a programme of austerity for the previous year. The PDL, capturing the public disillusionment with austerity, began to advocate an economic policy based upon growth as the central objective. Key to this plan was a return to fiscal expansion, even at the expense of abandoning the benefits that had been derived from the austerity programme of the previous year. The markets responded with a movement away from Italian government bonds, raising the rate on the 10 year bond, thus reversing the trend of the previous year.
Apart from a few sporadic outbreaks of violence, the election went reasonably smoothly. By the evening of Monday 25th February, it had become evident that, whilst there was no clear winner of the election, the parties of growth had gained the upper hand. This started a round of negotiations to form a coalition government. The hurly burly of coalition building continued throughout the week and by the evening of Thursday 28th February, Mr Berlusconi announced that he had sufficient support from his coalition partners to form a government. At that point, President Napolitano invited Mr Berlusconi to be sworn in as the new Italian Prime Minister at 18:00 hrs CET the next day.
At this point, the markets responded. Although the markets in Europe were closed, not to re-open until Monday 4th March, it was still Friday afternoon in New York, where there was heavy selling of Italian bonds. Pressure started to mount on the 10 year benchmark Italian bond, which had moved to beyond 8% by 22:00 hrs CET (17:00 hrs EDT) at close in New York.
At that point, in response to the financial pressure placed upon the Euro in New York, Mario Draghi, President of the ECB, broke off his weekend to give an emergency press conference. In it he announced that a series of talks with the People's Bank of China had resulted in what he thought was an agreement of two parts, to commence immediately. In the first part, the People's Bank of China would signal its intention to arrange for the purchase of €500 billions of Euro denominated sovereign bonds belonging to a range of stressed Eurozone nations, including Italy. In the second part of the deal, the ECB would swap out part of the bonds - whose purchase had been arranged by the People's Bank of China - for a range of sovereign bonds belonging to a range of non-stressed Eurozone nations, including Germany, held by the ECB.
But then a problem is announced. Perhaps China may be ready to act, but it did not want a bilateral deal without the co-operation of other powers.... and there may be some further conditions...
All eyes then turned to the Asian markets, with Tokyo set to at 01:00 hrs CET on Monday 4th March .....
The national budget for 2013 was approved by Parliament in December. True to his word, Mr Monti stood down as the Prime Minister, which was the cue for a General Election. Mr Monti, despite not having a party base, announced that he would be available to form a coalition and serve as Prime Minister after the election, should the results warrant that option. The President of Italy, Giorgio Napolitano, called a General Election for February 24th. He was mindful of holding the ballot during Lent. The UDC - the Catholic Party - approved his decision, which had the effect of legitimising the election.
Politically, the PDL had found Mr Berlusconi to be both a liability and an asset. He was seen in Italy as something of a comic figure, and many Italians blamed him for Italy being the laughing stock of Europe. However, Mr Berlusconi was also quite adept at capturing the public mood and, with the experience of using his media assets, turning this into electoral support. There was a groundswell of opinion in favour of a policy aimed at growth which resulted in political support in the opinion polls.
Campaigning was bitterly contested between those parties who advocated policies of growth and those parties who felt that it would be right to continue the policy of financial probity. Occasionally, these disputes became violent as Italian society started to polarise around the two issues. Mr Berlusconi was able to portray Mr Monti as the "German Prime Minister", as the campaigning became acrimonious and personal. During the campaigning, Mr Berlusconi hinted that he would pursue a growth policy, even if it meant that Italy had to leave the Euro. As he did so, the election campaign took on a new dimension between those who were pro-Europe, and those who toyed with the idea of leaving the EU.
On Friday February 22nd, after a series of extremely violent confrontations between the various factions in Italian politics, a number of polling stations were the target of what appeared to be a concerted fire-bombing campaign. The damage was not severe enough to cause the suspension of the General Election, and it lead President Napolitano, mindful of the Presidential Election scheduled for May 2013, to ignore calls to postpone the General Election.
Friday 1st March was full of rumour and speculation that Mr Berlusconi would be unable to attend his swearing in. First, it was rumoured that the coalition was unravelling over the question of who would have ministerial responsibility for relations with the EU. A press statement at 12:00 hrs CET announced that Roberto Maroni of the Northern League, a prominent Eurosceptic and advocate of a return to growth and the exit of Italy from the EU, would hold that portfolio.
There was then speculation that an alternative coalition, one a bit more favourable to the policy of financial probity, led by Pier Luigi Bersani of the Democratic Party (PD), had been formed. There was then a rumour that Mr Monti had been able to garner support for a coalition government. As the afternoon wore on, this speculation amounted to nothing more than just rumour and hearsay. As this was happening, the markets remained relatively calm as traders waited to see whether or not Mr Berlusconi would be sworn in as planned, despite persistent rumours that the new government had signalled that work to print the New Lira should commence. In the event, Mr Berlusconi was sworn in as planned.
Pier Luigi Bersani