ROME — Italian bond yields rose Monday, and stocks in Milan led major European indexes lower, after a weekend of political turmoil in Italy gave rise to fears that the country was headed for renewed instability.
The former prime minister, Silvio Berlusconi, said he would again seek Italy’s highest office after pulling his party’s support from Mario Monti, the unelected official who currently holds the office. Mr. Monti decided over the weekend to step down.
Mr. Berlusconi, a four-time prime minister, left office a year ago as markets pushed Italy to the brink of financial collapse. Mr. Monti has restored Italy’s credibility with investors, who have given the country a break on its borrowing costs. But those gains have come at the cost of painful austerity measures that have worsened the country’s economic situation and given Mr. Berlusconi an opening to attack.
Mr. Monti will leave after Parliament passes a budget this month and may contest national elections against Mr. Berlusconi, with the vote — previously scheduled for April — now possible as early as February or March.
The Milan benchmark MIB index fell as much 2.7 percent in afternoon trading Monday, having fallen as much as 3.6 percent. Italian banks — which as big holders of government bonds remain sensitive to declines in the prices of those bonds — were the big losers. Intesa Sanpaolo, the most active stock, fell 6.2 percent and Unicredit declined 5.9 percent.
The yield gap, or spread, between interest rates on Italian 10-year sovereign bonds and equivalent German securities, the European benchmark for safety, grew to 3.5 percentage points Monday from 3.25 points late Friday, suggesting that investors were growing more wary of holding Italian debt. The Italian 10-year bonds, for which the yield peaked this year at more than 7 percent, were trading to yield 4.8 percent, up 29 basis points. A basis point is one-hundredth of a percent.
A barometer of euro zone blue-chip stocks, the Euro Stoxx 50 index, fell 0.5 percent late in afternoon trading. The euro was little changed from its levels in New York on Friday, at $1.2932.
“It’s as if a tank moved through” the market, said Mario Sechi, editor in chief of the Rome daily newspaper Il Tempo, speaking on Radio 24 on Monday morning. Like many Italian commentators, Mr. Sechi expressed reservations about Mr. Berlusconi’s decision to return to politics.
A dismal economic report Monday served as a reminder that despite Mr. Monti’s success with investors, the real economy continues to suffer. Italian industrial production fell a seasonally adjusted 1.1 percent in October from September, and by 6.2 percent from a year earlier, Istat, the national statistics agency, reported from Rome.
The coming Italian election “remains high on our list of tail risks for 2013,” Holger Schmieding, an economist in London with Berenberg Bank, wrote in a research note. “A Berlusconi campaign against ‘German austerity’ could potentially unsettle markets,” he wrote, and possibly push Spain or Italy into the need for a bailout or require additional bond purchases by the European Central Bank to hold down borrowing costs.
Chancellor Angela Merkel of Germany was to meet Monday with Mr. Monti on the sidelines of the Nobel peace prize ceremony in Oslo, said Georg Streiter, a spokesman for the chancellor.
Ms. Merkel pushed to have Mr. Monti replace Mr. Berlusconi, but found herself on the receiving end of the Italian technocrat’s own campaign for a course of European reform focused more on growth and creating jobs than the restructuring and austerity championed by the German leader.
As a rule, the German government does not comment on its partners’ domestic politics, but Foreign Minister Guido Westerwelle warned that an attempt to scale back Italy’s reform push could result in further destabilization in the euro zone.
“Italy can not remain stagnant on two-thirds of its reform process,” Mr. Westerwelle said through a spokesman. “This would throw not only Italy, but the rest of Europe, into turbulence.”
Spanish bonds also came under renewed pressure following Mr. Monti’s announcement, with the interest rate spread of Spanish 10-year bonds over equivalent German bonds rising to 4.27 percentage points from 4.16 points on Friday. The yield on the benchmark Spanish 10-year rose 10 basis points to 5.5 percent; it reached 7.1 percent in July, amid concerns that Spain would be forced into a full bailout after having to negotiate a €100 billion rescue package for its banks in June.
Luís de Guindos, the Spanish economy minister, warned that Italy’s political turmoil would have an impact on his country. “When doubts emerge over the stability of a neighboring country like Italy, which is also seen as vulnerable, there’s an immediate contagion for us,” he said Monday morning on Spanish national radio.
Asked whether Spain would itself seek further European rescue funding, the economy minister instead said that “the help that Spain needs is that the doubts over the future of the euro be removed.”
Speaking ahead of the Nobel ceremony on Monday, the European Commission president, José Manuel Barroso, said that Italy had to “continue on the road of structural reforms.” The elections, Mr. Barroso said on Sky News, “must not be used to postpone reforms.”
David Jolly reported from Paris. Raphael Minder contributed reporting from Madrid and Melissa Eddy from Berlin.
Euro Watch: Italian Political Turmoil Weighs on Markets
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Euro Watch: Italian Political Turmoil Weighs on Markets
