Following market turmoil and spiking bond yields across the eurozone Wednesday, news on Thursday gave investors some relief. Italy held a successful debt auction, selling bills worth €5 billion at an average yield of 6.087%. That’s up from 3.57% on similar maturity securities sold last month, but a successful debt sale nonetheless.
Another factor that likely calmed some jitters was the Italian parliament accelerating approval of their critical 2012 budget (to which many pro-growth and austerity measures are tied) up to week end. Following the approval of the budget, Prime Minister Silvio Berlusconi will resign, making room for a government led by former EU commissioner Mario Monti or former Prime Minister Giuliano Amato (although Monti appears to be the front-runner right now)—both are seen as better alternatives to the much-maligned Berlusconi.
Political turmoil is generally a negative, but in the PIIGS’ case, government turnover has been the norm. Ireland and Portugal both got new governments, and a new one in Spain is a matter of time—current Prime Minister Jose Zapatero has announced he won’t seek reelection. In each case, the incoming governments have been more committed to austerity and pro-growth reforms and have generally been viewed as moves in the right fiscal direction.
Greece’s government, like Italy’s, is currently in flux. In fact, Thursday, following three days of Greek political theatrics, former ECB Vice President Lucas Papademos emerged as the interim government’s next prime minister (following the ouster of Prime Minister George Papandreou). Thus, a Papademos-led caretaker government will be tasked with approving the eurozone’s latest €130 billion Greek bailout plan—which includes a 50% haircut for private holders of Greek debt, austerity measures and other concessions.
As the European periphery gets its political houses in order in the next few weeks and even months, it’s important to remember there’s still much more work to be done. And though there is some concern over the efficacy of the EFSF and ECB’s remaining tools should Italy (the largest of the PIIGS) run into trouble, they still have plenty of firepower should they need it. However, along the way to some combination of bailouts, fiscal reforms and growth, expect bureaucrats to dither, hem and haw before ultimately reaching consensus. It’s in their interest to see countries (like Italy and Greece recently) take steps to right their own houses before supranational organizations make major moves. But at the end of the day, periphery politicians and eurozone bureaucrats alike see benefit to preserving the union or at the very least, preventing a sudden and disorderly disintegration.