Italian markets were jolted Monday by the weekend collapse of the country's coalition government after just five months, but the chance that early elections could be averted kept losses in check.
Silvio Berlusconi withdrew his support for a grand coalition led by Prime Minister Enrico Letta, just a week before a parliamentary committee was due to vote on expelling the convicted fraudster from the Senate.
Milan's benchmark index fell 1.8%, and the yield on Italy's 10-year bonds rose 18 basis points to 4.6%. That is up from around 3.9% when Letta took office in April but far from the more than 7% during the peak of the eurozone debt crisis in 2011.
Other European markets fell by about 1% as a U.S. government shutdown loomed. The dollar was a shade firmer against the euro.Related: Stocks weak as U.S. shutdown looms Political instability is nothing new in Italy -- governments tend to last little more than a year on average.
But a prolonged period of deadlock could prevent agreement on a budget for 2014 and delay reforms needed to keep the eurozone's third largest economy on track to meet EU-mandated borrowing targets.
Letta has scheduled a vote of confidence for Wednesday and hopes to persuade disgruntled members of Berlusconi's party and other senators to back him. Failure would raise the chance of a new election and with it the risk of months of political stalemate just as Italy, and the eurozone, look to secure a recovery from recession.
"Snap elections would be the worst scenario for confidence," noted Silvio Peruzzo, economist at Nomura.
Italy's economy is showing signs of stabilizing after nearly two years of recession. Tough austerity measures have helped produce a primary budget surplus and a wide-ranging program of structural reforms is beginning to bear fruit.
Silvio Berlusconi withdrew his support for a grand coalition led by Prime Minister Enrico Letta, just a week before a parliamentary committee was due to vote on expelling the convicted fraudster from the Senate.
Milan's benchmark index fell 1.8%, and the yield on Italy's 10-year bonds rose 18 basis points to 4.6%. That is up from around 3.9% when Letta took office in April but far from the more than 7% during the peak of the eurozone debt crisis in 2011.
Other European markets fell by about 1% as a U.S. government shutdown loomed. The dollar was a shade firmer against the euro.Related: Stocks weak as U.S. shutdown looms Political instability is nothing new in Italy -- governments tend to last little more than a year on average.
But a prolonged period of deadlock could prevent agreement on a budget for 2014 and delay reforms needed to keep the eurozone's third largest economy on track to meet EU-mandated borrowing targets.
Letta has scheduled a vote of confidence for Wednesday and hopes to persuade disgruntled members of Berlusconi's party and other senators to back him. Failure would raise the chance of a new election and with it the risk of months of political stalemate just as Italy, and the eurozone, look to secure a recovery from recession.
"Snap elections would be the worst scenario for confidence," noted Silvio Peruzzo, economist at Nomura.
Italy's economy is showing signs of stabilizing after nearly two years of recession. Tough austerity measures have helped produce a primary budget surplus and a wide-ranging program of structural reforms is beginning to bear fruit.