News Analysis: Negative trend for some economic indicators in Italy could become a cause for concern

Yields on Italian debt rose to their highest levels since late 2014 this week, while stock prices sunk to their lowest levels of the year, as investors began to price potential political instability into their evaluations.

To be sure, the problems are not uniquely Italian: financial analysts said jitters about right-wing populist leader Marine Le Pen's chances of winning in the upcoming elections in France, along with inflation worries, were on investors' minds. But the prospect of snap elections in Italy combined with more long-standing problems like anemic economic growth and an unhealthy national banking sector are making the problems particularly acute.

"To some significant extent, European worries are hurting certain indicators in Italy," Francesco Daveri, an economist with Rome's Sacro Cuore University, said in an interview. "But worries about the banking system or the economy are also important, because it's not clear how effectively the government will be able to confront them."

Paolo Gentiloni is now Italy's fourth consecutive appointed prime minister, dating back to 2011, when then-Premier Silvio Berlusconi resigned amid fears that skyrocketing interest rates could force Italy to default on its debt. Since then the country has seen the rise of the populist Five-Star Movement led by comedian and activist Beppe Grillo and in the last six months it has endured a bruising political battle over a constitutional reform referendum that forced Gentiloni's predecessor to step down.

More recently, a ruling from Italy's Constitutional Court has opened the door that parliamentary elections scheduled to be held in April 2018 could take place this year and fears that Grillo's allies could be strengthened by such a vote have made some investors nervous.

"Anything that makes Italy seem like more of a risk than it had been will send some investors looking elsewhere," Hildebrandt and Ferrar economist Javier Noriega told Xinhua. "If the risks become more significant, the impact will be greater."

The impact so far has been significant. The Italian Stock Exchange in Milan will close trading for the month of January lower than it started the month, and consumer confidence reversed course from the start of 2016 and has been inching lower ever since the height of the referendum battle late last year.

Most importantly, bond yields are on the rise. The yield on Italy's benchmark 10-year bonds on secondary markets touched 2.36 percent, a level last seen in November 2014. In December, yields were below 1.85 percent.

While the current levels are still far below the higher-than-7-percent yields that drove Berlusconi from power, the increase is significant. Bond yields are immediate barometers of a country's economic health: the higher the yield, the more the government must pay to borrow money. That is an important factor for government like Italy's, which is already short on cash because of a declining tax base and slow economic growth.

"Nobody is thinking that Italy will not be able to pay its debts," Daveri said. "But some investors may be feeling a little less comfortable."

Noriega agreed: "It's too early to tell whether this is a temporary situation or the start or a worrying trend," he said. "But it's something many people will be watching closely." Endit