Political Instability Hit Greece and Italy

If the euro zone debt problems are enough to give you headaches, then make sure you have a boatload of aspirin by your side before you read on. Aside from ballooning debts, another problem that has hit the region is the increasing political instability in Greece and Italy.

Greece

Last week, George Papandreou, then Prime Minister of Greece, agreed to step down from his post and form a national unity government with opposition leader Antonis Samaras to secure Greece the next tranche of financial aid that it badly needs.

If you remember, Papandreou’s last days were pretty action-packed. In a move that surprised the markets, the euro zone leaders, and even his finance minister, Papandreou decided to put the bailout to a referendum. This was taken negatively by his critics as it resulted in a spike in risk aversion and almost led to Greece being rejected out of the euro zone.

Pressure from his critics eventually proved too much, and Papandreou was forced to cancel the referendum. With Greek government in disarray, Papandreou was forced to resign and form a unity government for wider support. Now, the question needs to be answered is this: who will lead this new combined political party?

Well, we’ll just have to wait and see!

Italy

Heading over to the land of pizza, pasta, and mounting debt, the political landscape isn’t that much different. Italian Prime Minister Silvio Berlusconi is also under pressure to resign.

Some market junkies blame him as the reason why Italian bond yields surged to over 6.4% last week when he came to the G20 summit empty-handed. You see, everyone was expecting him to present a detailed austerity plan after he watered down Italy’s initial 45.5 billion EUR austerity package.

Some say that his lack of preparedness might have sent bond yields skyrocketing pretty close to the 7% level. That’s around the same level where Greece, Italy, and Ireland were forced to ask for bailouts! If the Italian government fails to implement the necessary reforms, market geeks are predicting that the ECB could stop purchasing Italian bonds altogether. Duhn duhn duhn duhn.

Unlike Papandreou though, it doesn’t look like Berlusconi is willing to let go of his job just yet. Amid domestic and international pressure, he confidently announced that he still has a hold of the majority in the Parliament to pass his budget proposals.

We’ll find out tomorrow whether or not Berlusconi still has enough friends from his People of Freedom party. If he doesn’t secure enough votes to pass the budget, he will most likely call for a confidence vote, a move he usually uses to reel in rebellious lawmakers.

Berlusconi’s plan may backfire this time though. From what I’ve heard, opposition parties are campaigning to vote for no-confidence to send him packing his bags. Yikes!

We know that political instability doesn’t usually bode well for currencies. However, in this old man’s humble opinion, it seems like the resignation of these two leaders may actually be bullish for the euro.

Although policymakers have yet to decide who the contenders will be for Prime Minister, analysts say that Papandreou’s leave will give markets confidence as a new government would imply that Greece is more united in tackling the debt crisis. As for Italy, it looks like investors aren’t seeing Mr. Berlusconi credible enough to implement the necessary reforms to keep Italy from plunging into a default.

Then again, that’s just me. What do you think?