Italy ETF Falls on Berlusconi Threats

The iShares MSCI Italy ETF (NYSEArca: EWI) is off 2.4% Monday on volume that has already eclipsed the daily average on news that embattled former Italian Prime Minister Silvio Berlusconi is threatening to topple the government if he is removed from the country’s senate for a tax fraud conviction.

Heading into the start of trading Monday, EWI had gained 5.4% in the past month as some of the ETFs that were previously viewed as the most controversial to offer Eurozone exposure have soared. While there is no ETF exclusive to Portugal, some of the funds tracking the other PIIGS nations have been impressive performers in recent weeks. [PIIGS ETFs Oink Back to Life]

EWI gained 12.3% over the past six months as new Italian prime minister Enrico Letta brought some semblance of political stability to one of the most politically volatile developed markets in the world. However, a rift with Berlusconi threatens to undo Italy’s recent stability. [Spain, Italy ETFs Under Pressure]

Yields on 10-year Italian sovereign bonds rose slightly in European trading today to 4.39%, a spread of about 160 basis over comparable U.S. Treasuries. Some market participants believe that yield spread could more than double if the Italian government is toppled. Italy, the Eurozone’s third-largest economy, is expected to raise almost $5.4 billion in a bond auction Tuesday.

Relations between Letta and Berlusconi are tense. Italy’s parliament is currently debating an unpopular housing tax reform which will be decided on Wednesday, but Berlusconi’s PDL party has threatened to bring down the government if the reform is not abolished, according to Euronews.

The vote to expel Berlusconi from the Italian senate is expected in October and if Monday’s performance is any indication, EWI can ill afford an ongoing spate of negative headlines. EWI, previously one of the most damaged ETFs during the worst days of the European sovereign debt crisis, has been a leader among Europe ETFs in recent months.