Italian political crisis kicks off campaigning as markets watch

Italian Prime Minister Mario Monti's imminent resignation has set off campaigning for an election expected in February, with financial markets on edge at the prospect of a return to an old-style Italian political crisis.

On Saturday the 69-year-old former European commissioner unexpectedly struck back against Silvio Berlusconi's People of Freedom (PDL) party which opened the crisis by withdrawing support from his government last week.

After meeting President Giorgio Napolitano on Saturday, he announced he would resign as soon as the 2013 budget is passed.

The vote was already scheduled for no later than April and

Monti's move likely will bring it forward to February, but it

may unnerve markets especially since Berlusconi announced his intention to seek a fifth term as prime minister.

Berlusconi was forced to resign during a ballooning euro

zone debt crisis that had pulled Italy into its vortex while his government put off needed reforms, and amid a sex scandal involving pole-dancing prostitutes at his "bunga bunga" parties.

Opinion polls give the 76-year-old billionaire little chance

of success, with the centre-left Democratic Party (PD) under Pier Luigi Bersani holding a strong lead. But the campaign could renew uncertainty about Italy's commitment to reform.

A former communist who is close to Italy's unions, Bersani

has promised to stick to the promises on fiscal discipline the government has made to European partners and has said that Monti

is likely to continue playing a role after the election.

The main barometer of investor confidence, the yield on the

10-year Italian government bond, stood at 4.5 percent at the end

of last week. That was 323 basis points higher than the yield on

the lower risk German equivalent, but well below the 7.3 percent

peak hit last year when the spread with German Bunds hit 550

points.

The political manoeuvring will drive up Italy's bond yields,

... contd.

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