European Markets Weaken as Pressure on Berlusconi Intensifies

Devan Biswas
07 Nov, 2011
New York City

European market indexes declined as focus shifted to Italy and bank stocks. Greek banks suffer the worst deposit withdrawals in the last two months as political wrangling sap the economy. Italy faces more political turmoil in the week as the coalition government suffers more defections.

[R]4:40 PM Frankfurt – European market indexes declined as focus shifted to Italy and bank stocks. Greek banks suffer the worst deposit withdrawals in the last two months as political wrangling sap the economy. Italy faces more political turmoil in the week as Prime Minister Berlusconi’s party suffer more defections.[/R]

In a cautious trading, European markets edged lower after Greek Prime Minister George Papandreou worked with the opposition leader to form a government.

The decision was widely expected as two leaders worked to form a unity government that will focus on passing the Greek budget, approve bailout plan proposed by the EU and implement austerity measures.

After a tumultuous weak in Greek politics, President Karolos Papoulias announced the agreement on Sunday and urged both parties to form a new cabinet as early as Tuesday.

However the months of political wrangling and power struggle in the parliament has wreaked havoc to the Greek economy. Greek production declined more than 5% last week and economic activities for small retailers have come to a near halt.

Greek banks have seen steady withdrawals from banks more than €10 billion have been taken out of the Greek banking system according to several sources in Athens.

Italian Political Turmoil

Investors are also worried on the rising political tensions in Europe. The market index in Milan surged on the expectations that Prime Minister Silvio Berlusconi may resign as early as today.

Two separate reports from local news papers raised the possibility of his resignation. Giuliano Ferrara, editor of the Foglio newspaper comments on Berlusconi and said “It is a question of hours, some say of minutes.”

However, later in the day, Berlusconi rejected the rumors and said he is not contemplating to resign.

Italian bond yields soared to 6.67%, up 40 basis points in trading today on the political uncertainties. The slow moving political process in the European Union and may lead to once unthinkable Italian bond restructuring as early as next year.

Italy has €1.9 trillion of sovereign debt and needs at least €300 billion of new debt every year to support its budget. Unless new austerity measures kick in, the approved spending cuts of €85 billion will be eaten up by the higher yields that the markets demand.

Italy may be forced to restructure its debt as Greece was forced to agree to debt restructuring that cuts its debt by 50%, which was unthinkable only eighteen months ago.

If Italy is forced to restructure its debt that will set off widespread losses in the banking sector and may force the nationalization of the Italian banks. Italian bank stocks have declined between 80% and 90% since the peak in 2008.

One third of the members of Berlusconi party quit last night and joined opposition and six more asked for his resignation in a letter to newspaper Corriere della Sera last week.

The member of the Northern League, the government coalition partner, and Interior Minister Roberto Maroni said in a television show, “I fear we no longer have a majority in parliament.”

On the weekend Berlusconi “invited” the International Monetary Fund to monitor austerity measures, a condition placed by the European Central Bank before the purchase of more Italian bonds.

In Paris, the CAC-40 Index fell 28.28 or 0.5% to 5,498.88 and in Frankfurt the DAX Index decreased 1.68 to 5,964.48.

The indexes in Stockholm fell 1.2%, in Madrid fell 1%, in Milan gained 2% and in Zurich edged down 0.2%. The index in Athens declined 0.6% and in UK traded down 0.5%.

German industrial Production Falls 2.7%

German industrial production fell 2.7% in September from the previous month, the largest monthly decline since February 2009.

Capital goods production declined 4.7% and industrial production decline in August was revised to a decline of 0.4% from the fall of 1% in the previous estimate according to the Economy Ministry.

Gainers & Losers

Commerzbank declined 6.6% to €1.64 after the German bank reported third quarter operating loss of €855 million compared to €116 million a year ago quarter.

Deutsche Bank AG increased 0.3% to €28.46, BNP Paribas SA added 1.4% to €31.32 and Societe Generale SA added 1% to €18.10.

Intesa Sao Paolo SpA increased 5 cents to €1.18 and UniCredit SpA increased 2 cents to 80 cents.

HSBC Holdings plc decreased 1.20 pence to 538.80 pence and Barclays fell 1.1 pence to 182.49 pence.

BMW AG increased 1.3% to €58.60, Volkswagen AG increased 1.4% to €117.60 and Daimler AG declined 17 cents to €34.79.

France Telecom SA increased 1 cent to €12.64 and Publicis Groupe SA added 49 cents to €35.86 after the two companies formed a joint venture to set up a fund of 300 million that will invest in Internet start ups.

The fund plans to invest between €500,000 and €1 million in the early stage companies and invest as much as €15 million in more promising start ups.