ITALY starts forming a new government after the resignation of Silvio Berlusconi, with economist Mario Monti tipped as the man to lead the country through its debt crisis.
President Giorgio Napolitano was scheduled to hold talks overnight with political parties before giving his mandate for the formation of a new cabinet that will have to move quickly to push through painful economic reforms.
The talks are expected to last until after midnight, Melbourne time, with investors pushing for a new government to be in place by today, in time for the opening of the markets, where Italy was hit last week by a wave of panic.
The 86-year-old Napolitano, a former Italian Communist Party leader, holds a largely ceremonial role but has been acrucial behind-the-scenes negotiator in the crisis.
International leaders have warned Italy against holding early elections, saying a prolonged political crisis in the euro zone's third-largest economy could drag down the entire euro area.
Markets have already given their blessing to the nomination of the 68-year-old former European Union commissioner as prime minister, with borrowing costs easing from record highs and the stockmarket rallying as speculation intensified that he would be chosen.
Mr Berlusconi announced on Tuesday that he would resign after a parliamentary revolt left his centre-right coalition without a majority, and a gradual loss of political support in recent months amid a wave of sex scandals and legal troubles.
But he set the precondition that the Italian parliament first had to approve a package of economic reforms that he has promised to the European Union.
Aiming to reduce the country's debt of about $A2.57 trillion, the Chamber of Deputies approved an economic package that calls for raising the retirement age in coming years and selling real estate, among other actions.
The vote in the lower chamber was 380-26. The Italian Senate had already approved the measure in a 156-12 vote, a move that led to European and US equities rallying, while the euro turned higher.
Analysts say momentum remains behind calls for Mr Monti to head a technocratic government that will aim to implement austerity measures and other reforms to open up the nation's labour market.
Unaligned with any of Italy's major political parties, Mr Monti served two terms in the European Commission.
From 1999 to 2004, he was the commissioner for competition policy, where he led Europe's antitrust case against Microsoft Corp.
"While the policy agenda of the new government is still to be unveiled, we think Mr Monti's main focus will be on the liberalisation of non-tradeable goods sectors and labour market reforms," said Fabio Fois, an economist at Barclays Capital.
Speaking to reporters last week, Christine Lagarde, managing director of the International Monetary Fund, said "political clarity" was "much needed" in Italy and Greece.
Italy faces a daunting debt load second only to Greece in the euro zone.
Frequently Asked Questions about this Article…
Who is Mario Monti and why is he being tipped to lead Italy?
Mario Monti is an economist and a former European Commission commissioner who served two terms and led Europe’s antitrust case against Microsoft. Unaligned with Italy’s main parties, he’s being viewed as a technocratic choice to steer the country through its debt crisis and deliver tough economic reforms.
How have markets reacted to the prospect of Monti becoming Italy’s prime minister?
Markets have reacted positively: borrowing costs eased from record highs, stock markets rallied and the euro strengthened as speculation grew that Monti would be chosen. Investors pushed for a new government to be in place quickly — ideally by market open — to calm panic.
What specific economic reforms has Italy approved that investors should know about?
Parliament approved an economic package aimed at cutting about A$2.57 trillion in debt that includes raising the retirement age and selling real estate, among other measures. The Chamber of Deputies approved the package 380-26, after the Senate’s 156-12 vote.
What reform agenda is Monti expected to pursue and how might that affect investors?
Analysts expect Monti to focus on austerity and liberalisation of non-tradeable goods sectors plus labour market reforms. For investors, that could mean policy moves to open markets, boost competition and improve fiscal positions — developments that typically influence bond yields and equity sentiment.
Why does Italy’s debt load matter to everyday investors in global markets?
Italy has one of the largest debt loads in the euro zone, second only to Greece, so political instability or slow reform could weigh on the wider euro area. Prolonged crisis risks dragging down European markets, so investors watch Italy for signals about sovereign risk and contagion.
What was Silvio Berlusconi’s role in the government change and did he set any conditions?
Silvio Berlusconi announced his resignation after a parliamentary revolt left his coalition without a majority. He conditioned his resignation on parliament first approving a package of economic reforms he had promised to the European Union.
How important is political clarity in Italy right now, according to international institutions?
International figures like IMF managing director Christine Lagarde said political clarity is 'much needed' in Italy (and Greece). Clear, swift political decisions are seen as essential to stabilise markets and allow reforms to proceed.
What is the expected timeline for a new Italian government and why does timing matter for investors?
President Giorgio Napolitano was holding talks with parties to give a mandate for a new cabinet quickly, with investors pushing for a government to be in place by the next market open. Timing matters because rapid formation can reduce market panic and allow urgent reforms to be implemented to stabilise borrowing costs and market confidence.
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