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Berlusconi video threat shows Italy still risks crisis

Holly Ellyatt
Franco Origlia | Getty Images News | Getty Images

Another political crisis could be imminent in Italy after an ally of Silvio Berlusconi said the convicted politician was ready to bring down the government and analysts warned that investors should be wary of more nasty surprises from the country.

"There is an argument that investors are becoming complacent about events unfolding in the Italian capital given that markets attention is broadly elsewhere at the moment," Michael Hewson, senior market analyst at CMC Markets, told CNBC on Friday.

A close ally of Silvio Berlusconi, Daniela Santanche, said on Thursday that the former president had prepared a video message that could announce a decision to bring down Italian Prime Minister Enrico Letta's coalition government.

"It's ready, Berlusconi will decide when to broadcast it and I think it is absolutely imminent," she told a news conference on Thursday, according to Reuters.

Her announcement comes ahead of a meeting of a special Italian Senate committee on Monday which has to vote on whether to strip Berlusconi of his seat in parliament after he received a four-year jail sentence for tax fraud in August.

"If Berlusconi did choose to go about bringing down the government I'm guessing it would be because he feels has nothing much to lose, given that without him his party would lose a lot of its political relevance," Hewson told CNBC on Friday.

(Read more: Italian stocks tumble as Berlusconi battle heats up )

Alastair Newton, political analyst at Nomura, also remarked in a note on Thursday that "the possible expulsion of Silvio Berlusconi poses a significant threat to the stability of the ruling coalition."

Indeed, members of Berlusconi's "People of Liberty" party have already threatened to resign if their leader is kicked out of parliament and the conviction has strained already-tense relations in the coalition government between the center-left led by Letta and Berlusconi's center-right.

The tensions have contributed to delays to reforms just as the latest economic data showed Italy's budget deficit widening, with state-sector borrowing almost doubled in August from a year ago.

(Read more: Italy's crucial tax deal will come at a cost )

Though a far cry from previous political crisis when government bond yields hit 7 percent, Italy's borrowing costs have edged higher over the last month. The yield on Italy's ten-year benchmark has risen almost 20 basis points this week hitting 4.55 percent on Thursday.

"Irrespective of how things turn out on Monday, political risks are likely to remain fairly high on the agenda for some time to come," Hewson remarked.

On the other hand, some argue that Italy's fragile political situation shouldn't concern investors too much, partly because of the frequency of political turmoil in the country.

(Read more: Is the net closing in on 'Houdini' Berlusconi?)

"Markets have not been paying a great deal of attention to Italian politics, it's sunk out of market sight for the time being," Paul Donovan, managing director of global economics at UBS, told CNBC on Friday.

"Italian politics could certainly provide noise and some surprises to investors that have rather forgotten about Italian politics but I don't think it will create a lot of economic damage. Political instability is not exactly unheard of, and what we tend to find in periods of instability in Italian politics is that the economic and fiscal policy tend to go onto a default setting which is something that markets wouldn't be too scared by."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld

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