The Euro declined against both the Pound and the US Dollar yesterday afternoon in reaction to news that political gridlock in Italy could stall the Eurozone’s economic recovery this year.
The Pound to Euro exchange rate rebounded from a 16-month low of 1.1346 to climb by over 2.5 cents to 1.1605 (GBP/EUR).
The Euro to US Dollar exchange rate followed a similar trajectory, depreciating by around 2.5 cents to 1.3080 (EUR/USD) in response to the worrying news that a stable government may not emerge from the latest general elections in Italy.
Luigi Bersani’s centre-left coalition were the favourites to take control of both the lower house and the senate, which would have given them the appropriate powers to continue with Italy’s tough path to economic reform. However, financial markets were rocketed by news yesterday afternoon suggesting that Silvio Berlusconi’s centre-right coalition is likely to have won the vote for the senate.
If the latest data proves to be accurate, and Bersani assumes power in the lower house and Berlusconi takes over in the senate, it will be very difficult for Bersani’s centre-left coalition to push through any of the important reforms that markets view as crucial for the smooth running of the 17-nation bloc.
Italy is currently mired in a deep recession of six consecutive quarters without growth. However, since technocratic Prime Minister Mario Monti was brought in towards the end of 2011, government borrowing costs have fallen significantly and a series of tough austerity measures have helped put the country back on the path to economic recovery.
The threat of Italy U-turning on its fiscal consolidation targets has the potential to reignite Eurozone debt crisis fears, and could lead to a protracted period of uncertainty in the currency bloc’s third largest economy.
The Italian election results were especially worrying for markets as the largest number of single party votes went to comedian-turned-politician Beppe Grillo’s populist 5-Star Movement party.
Grillo has vowed not to form a pact with any of the mainstream parties, and has managed to attract significantly more votes than outgoing technocratic PM Mario Monti. The 5-Star Movement Party benefitted from a surge of voters who were disgruntled at the prospect of, either, further painful austerity measures, or another term under a leader embroiled in a string of political and personal scandals.
The ‘spread’, between the benchmark German 10-year bund and the equivalent Italian paper, increased from 258 to 293 basis points yesterday as investors lost trust in the region.
With markets anxious of political instability and the potential threat of another round of elections the Euro plummeted: EUR/JPY sunk by -5.0 cents to 120.31, EUR/AUD shrunk by -2.0 cents to 1.2710, EUR/NZD declined by -2.1 cents to 1.5650, and EUR/CAD tumbled by -2.4 cents to 1.3380.
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