I would recommend reading the following since many decisions in Europe following the semi-resignation of Berlusconi will be taken by Goldman boys.
From Goldman Sachs:
Italy - What's Next
After seeing his parliamentary majority decline further in a routine
vote earlier today, Italian PM Berlusconi offered to resign once
Parliament approves new austerity measures, possibly towards the end of
next week. We see three possible outcomes at this delicate stage, with
different implications for the BTP market and Italian risk premium more
Most likely scenario: In the coming weeks, the
current centre-right coalition of the Northern League and PdL moves to
rally round another candidate who can gain wider acceptance domestically
and internationally. In order to broaden its support, the new
government may reach out to smaller centrist parties which can advance
their own political agenda.
A centre-right executive backed by a broader coalition and committed
to implementing the ‘troika’s' economic platform could eventually
stabilize markets. But the newly appointed Cabinet would need to prove
itself first, and the protracted uncertainty would weigh on economic
growth. Furthermore, reforming the pension system could meet resistance
from the Northern League. Still, it would be hard for the ECB and
Italy’s EMU peers not to stand by a new Italian government genuinely
trying to pursue reforms. Under this scenario, thanks to the ECB’s
interventions, we would expect BTPs to remain capped at around current
levels (400-450bp) over the average of Germany, France and the
Netherlands until measures are gradually approved.
Second most likely scenario: The centrist parties
ultimately turn down the offer to join a broader coalition. In this
case, more MPs from Berlusconi’s PdL party could join forces with
formations at the centre of the political spectrum. This could pave the
way for a government of national unity of sorts, led by a highly
reputable ‘outsider’. Like during the crisis of the early 1990s, the
advantage of such a ‘technocrat’ government is that it would be sworn in
after some ‘initial contracting’ on its programme (economic reforms
agreed with the ‘troika’, plus a new electoral law), which should lower
the implementation risk. A technocrat government could use its
credibility to introduce more growth enhancing measures that would pay
off further down the road. Lastly, it could focus on improving
governance (fiscal rules in the constitution, a smaller public sector,
We view this as the most market-friendly outcome, as it would lead
over time to a decline in sovereign spreads and in Italy’s risk premium
more broadly. The front-end would re-price more than intermediate- and
long-term maturity bonds because investors would likely take advantage
of the rally to reduce exposure at higher prices. Nevertheless, we would
expect BTPs to fall to around 350bp over Bunds in fairly short order.
Least likely scenarios: After Berlusconi’s resignation, general elections are called.
These could be held in mid-January at the earliest, although they would
most likely be postponed until the Spring amid market turmoil.
This would represent the worst scenario for markets, in our view.
Since President Napolitano is aware of this, he will probably try to
resist dissolving Parliament at this juncture. Also, most centrist
parties would want to change the electoral law before a new vote takes
All these scenarios will take some time to play out, a couple of
weeks at least. In the meantime, the higher priced Italian government
bonds will continue to be sold, as gradually higher margin requirements
are applied. On our central case, intermediate to long-end bonds should
continue to be supported relative to AAA-rated securities by the ECB.
In conclusion, we are most probably approaching the highs in Italian
yields (currently around 500bp over German Bunds in the bellwether 10-yr
sector, and 600bp in 2-yr maturities), but a volatile and unsettled
market remains our base case until Italy’s sovereign creditors can be
reassured that long-awaited structural reforms to lift the country’s
growth rate will be put in place.