The Italian Clown Weighs Heavily on the Euro

Investors got a chill up their spines this weekend as Silvio Berlusconi decided to reenter Italian politics. On Friday he announced his intentions to run for Prime Minister at the next election and then his party, the People of Liberty Party, withdrew their support for the government of current Prime Minister Mario Monti.

Monti, a well respected banker and business man on the global financial scene for many years had the highest of reputations and was appointed to lead the government after the resignation of Berlusconi in 2011. Berlusconi was forced from office by the EU leadership along with international investors, who were uncomfortable purchasing government debt. With Monti stepping in, the Italian government immediate was restored to respectability and the bond markets welcome Mario with open arms as well as the EU Ministers. Within a short period of time, Monti became a well respected advisor to the Eurogroup and helped steering the eurozone and dealing with the financial crisis, while trying to help Italy to recover.

Mr. Monti while well known and respected as a diplomat and a financier, was not a politician and never built a strong political base and was dependent upon Mr. Berlusconi’s party to give him the political clout he needed to run the country.

Unfortunately for Mr. Monti economic recovery is a slow difficult process which creates more pain before it can heal. The Italians are suffering that pain at the moment, and this is a very difficult problem for any government, this is witnessed by the demonstrations and riots in London last year and the strikes and civil unrest in Greece more recently.

Mr. Berlusconi is taking advantage of this current situation to re-emerge on the political scene. Even though he resigned in 2011 he was never out of the press headlines having been investigated and indicted for crimes ranging from fraud and bribery to prostitution. He was nicknamed “The Knight” for his antics as a media tycoon before he took office but he has been more rightly dubbed “The Italian Clown” now an embarrassment to the Italian government.

Mario with his back against the wall trying to push through a new Italian budget that will get Italy on the way to recovery lashed back announcing his resignation. The office of the President has officially announced that Mr. Monti will resign and if his budget is not passes he will step down immediately.

This political turmoil and uncertainty is weighing heavily on the euro in early trading today with the euro dipping to the 1.29 price down 39pts since the opening. There will most likely be more repercussions as the European markets open shortly as Italian yields should see a major effect. There are two government bond auctions on the calendar this week; investors will get a chance to be heard loud and clear.