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Italy Political Update

Declaration of candidacy by the former Prime Minister Silvio Berlusconi for the next Italian prime minister has created uproar in the Italian political landscape. He openly criticized the current Prime Minister, Mario Monti, for following tight austerity measures demanded by Germany and other European institutions. The return of business tycoon with great media muscle disheartened market for a while, leading to marginal widening of Italian yields and negative reaction from the Italian Stock Exchange.

Silvio Berlusconi's anti-austerity principles, his various tax frauds and involvement in underage prostitution had weakened Italy's credibility. This had spooked investors a year back when Italian bond yields rose to unsustainable levels. The credibility was restored with the appointment of unelected technocratic government of Mario Monti. In a recent development, Silvio Berlusconi's People of Liberty party withdrew its support from Monti's technocratic government, leading Monti to declare his resignation once 2013 budget law is passed.

However, despite a strong presence of Silvio Berlusconi's People of Liberty party in Italy, there is low likelihood of its winning, as the overall strength of the party has declined on account of weak leadership of Silvio Berlusconi, who is notorious for placing his interests before country. Silvio Berlusconi took a U-turn by declaring that he is ready to give up his political ambitions to make way for Monti's second term. It could be understood that by sponsoring Monti for a second term Silvio Berlusconi can maintain the presence of his party in Italy. However, Democratic Party presided by Pier Luigi Bersani has gained popularity recently, and is expected to win the upcoming elections in Italy. Bersani is in support of technocratic government, and is also trying to convince Monti to continue his job when his party wins the elections in early 2013.

The political pressures on Monti might compel him to run for the elections, but despite having done so much for Italy at government level, he is not popular among the masses for his tax policies and other austerity measures.

It is undeniable that Monti has been successful in keeping Italian yields at comfortable levels. Berlusconi's departure itself was triggered by a spike in Italian yields on account of market distrust on his demeanor. In order to keep the markets calm, there is high likelihood that Monti would be retained for his key role in Italy, irrespective of who comes out winner at the next election.

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