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Italy has just had a senior moment. Giorgio Napolitano, who will turn 88 in June, has been re-elected as head of state. In the short term this will break the political deadlock that has effectively ground the country to a halt since elections in February. Cue a near 2-per-cent rise on Monday in Italian stocks, while 10-year bond yields fell.
The real driver of Italian market performance cannot be economic fundamentals, which are dire. Let's face it. A wave of global liquidity means Italy is remarkably lucky in the timing of its political and leadership crisis.
That ought to worry investors. The last time Italy was in a predicament like this was the autumn of 2011. Between July and November of that year, the Italian 10-year bond yield jumped from 5 per cent to 7 per cent, the stock market tumbled 25 per cent, and Mario Monti was summoned.
Contrast today's market reaction. Since the inconclusive election in late February, the 10-year yield has fallen 80 basis points to a whisker above 4 per cent. Italy's political and economic plight is arguably worse now than 18 months ago. Projections show that public sector debt will be 130 per cent of gross domestic product this year – 4 percentage points higher than its last forecast in September. The head of the Confindustria business lobby says the gridlock has cost the economy 1 per cent of output.
The other beneficiary of liquidity is Spain. Despite its banking and financial crisis, a party funding scandal and the bailing-in of bank depositors in the rescue of Cyprus, Spanish 10-year bond yields are 300 basis points lower than they were last July.
Macroeconomic fundamentals are unmistakably deteriorating in both Spain and Italy, political events are discouraging and policy makers are dithering. But the fact is that they can afford to. A wave of liquidity stemming from quantitative easing and the European Central Bank's "whatever it takes" stance on the euro are giving them unexpected, indefinite breathing space. Italy without a government? Why worry? Just open those liquidity taps and look the other way.