Italy’s borrowing cost surges after poll

Italy’s cost of borrowing surged yesterday as investors dumped the country’s bonds in the wake of the general election.

Sovereign yields for Spain and Portugal also rose as concerns grew that political deadlock in the region’s third largest economy could re-ignite the eurozone crisis. Ireland’s spreads remained unchanged.

The election result was a hung parliament as the centre left Democratic Party, lead by Jean Luigi Bersani, marginally captured the lower house, while the former prime minister Silvio Berlusconi took the senate by the slimmest majority.

The technocrat prime minister of the past 18 months, Mario Monti, came a distant fourth. The populist comedian, Beppe Grillo’s ‘Five Star Movement’ made a better than expected showing in third place.

“As a repudiation of Monti’s reform agenda, it’s a blow to growth prospects in Italy. It increases sovereign risk in Italy, and raises the spectre of existential risk to the currency. But unless Grillo’s party comes to power — a small probability — these are mere tail risks. We now face weeks of uncertainty as an interim government is established, most likely a Bersani/Berlusconi coalition that excludes Monti, because Berlusconi will not work with him. New elections probably won’t happen until September, giving the establishment parties the opportunity to change electoral laws to block Grillo,” says Lorcan Roche Kelly, chief European strategist with the hedge fund Trend Macrolytics.

European bank stocks also fell following the election, led by Milan-based Intesa Sanpaolo SpA and UniCredit SpA,

UniCredit, Italy’s biggest bank, slumped as much as 10% to €3.76 in Milan, its largest intraday drop since Jan 9, 2012, while Intesa declined as much as 12%. France’s Credit Agricole SA, which has a branch network in Italy, slid as much as 6.6%.

A political stalemate in Italy is weighing on banks, among the biggest holders of Italian government bonds, as the gridlock threatens to derail 15 months of austerity under Prime Minister Mario Monti’s technocrat government.

“We should expect the market to price a tail risk of a eurozone break-up back into the bank stocks,” Dirk Hoffmann-Becking, an analyst at Societe Generale SA, wrote in a note.

The Euro Stoxx Banks Index fell as much as 5.5%, the most since Sept 26, as lenders from Portugal to Germany tumbled and the cost of insuring against default on European bank debt reached the highest in three months.

Banco Espirito Santo, Portugal’s biggest publicly traded bank, dropped as much as 6.6%, and was 4.6% lower at 94.3 cents by 4.21pm in Lisbon. Deutsche Bank AG, Germany’s largest bank, fell 3.9% percent to €34.78 in Frankfurt.

(Additional reporting — Bloomberg)