Source: Bloomberg

Italian 10-year government debt widened by 12 basis points against German debt while Italian bank stocks fell after former Prime Minister Matteo Renzi reportedly suggested an early Italian election to coincide with Germany’s national elections in September.

Unicredito, the country’s largest bank, fell by more than 4% in a trading day that saw the Italian index lose more than 2%. Italy’s yield spread against Germany remains below the crisis levels registered earlier this year, but the Italian economy and nonperforming loans of Italian banks still represent a major risk to the Eurozone’s third largest economy.

Under Italy’s proportional representation system, most of the country’s populist parties would not meet the minimum required to enter parliament, but the populists as a whole have enough support to overwhelm the established parties. One object of early elections is to pre-empt any attempt to form a coalition among the populists, whose largest party is the amorphous Five Star Movement, leaving Silvio Berlusconi’s Forza Italia and Renzi’s Socialists with a parliamentary majority. But uncertainty about electoral outcomes is so great that the market reacted negatively to the news of possible early elections.

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