Italian political uncertainty spooked investors, says ECB

Situation led to 'flight-to-safety' capital flows

Italian political uncertainty spooked investors, says ECB

Rome, January 17 - The European Central Bank said in its monthly bulletin on Thursday that "increased political uncertainty in Italy" had caused unease among investors. In December ex-premier Silvio Berlusconi's People of Freedom (PdL) party withdraw its support for Prime Minister Mario Monti's emergency government of unelected technocrats, sparking early elections, which will take place next month. Berlusconi also announced he had dropped plans to retire from front-line politics. The media magnate has since said that PdL Secretary Angelino Alfano is the centre right's premier candidate and that he wants to be economy minister if his coalition wins the elections, rather than be head of government for the fourth time. "Increased political uncertainty in Italy led to some flight-to-safety flows into bonds issued by AAA-rated countries," the ECB said. The spread between 10-year Italian bonds and the German benchmark, a key measure of investor confidence in Italy, rose sharply after last month's announcement of the resignation of Monti, who has stayed on as caretaker premier. But the bond markets have since calmed and last week the spread fell to its lowest level since July 2011. "Other factors contributed positively to market sentiment," the ECB said in its bulletin. "They include the agreement on common banking supervision (in the eurozone) under the auspices of the ECB, and the successful conduct of the Greek government's debt buyback operation, with the credit rating for Greece subsequently being upgraded six steps by Standard & Poor's. "At the end of December, the so-called "fiscal cliff" in the United States likewise caught the attention of market players on the euro area bond market. "The initial failure to reach an agreement sparked some flight-to-safety flows into AAA-rated euro area bonds, but the eventually struck deal improved sentiment regarding risky assets, and the yields on AAA-rated bonds increased".

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