By Eric J. Lyman
ROME, Aug. 26 (Xinhua) -- The Italian Stock Exchange was trading sharply lower on Monday as yields on government bonds rose, sending ripples beyond Italy as investors began to worry that Italy's political problems could have a lasting economic impact.
Economic analysts have been warning over the risks of the political crisis for weeks, but financial markets have mostly shrugged off the worries so far.
Monday's reaction was the strongest since the latest round of Italian political worries began after Italy's supreme court upheld a lower court conviction against billionaire tycoon Silvio Berlusconi.
Berlusconi's conviction carried a year of house arrest, which is likely to start in October, plus a possible expulsion from the senate that parliament is tentatively scheduled to vote on Sept. 9.
Berlusconi's allies have threatened to withdraw their support for the government of Enrico Letta if the ban is upheld. Letta's allies, meanwhile, have refused to be "taken hostage" by Berlusconi's demands, and talks to reach a compromise on the topic broke down last week.
"The situation is ripe for markets to have a strong reaction," said Michele Di Gregorio, a retired bank of Italy economist.
On Monday, they did. In mid-day trading, the blue chip index Milan's Italian stock exchange was down more than 2.5 percent in heavy trading, paced by Mediaset, Berlusconi's own television and cinema giant, which fell as much as 7 percent and saw trading in the shares halted for an hour.
According to some estimates, the share's fall reduced Berlusconi's personal fortune by as much as 270 million euros (361 million U.S. dollars).
Bond markets had a similar reaction, with yields on the benchmark 10-year government bonds rising for the second consecutive session Monday, while the spread -- the difference in the yields -- with German bonds widened to 246 basis points, the widest gap in weeks.
In addition, the jitters spread beyond Italy for the first time this month, as stock exchanges in Frankfurt, Paris, and Madrid were all lower Monday, with analysts citing Italy political worries as a culprit. The euro zones STOXX 50 index was also down, while the euro weakened against the dollar in early trading Monday before recovering.
The trouble is, there is no clear path to a resolution of the crisis. Italian President Giorgio Napolitano and Letta's allies in parliament appear intent on removing Berlusconi from the legislative body while waiting for a lower court to "reconsider" a full political ban, as ordered by the supreme court.
Berlusconi's lieutenants have threatened to make the government collapse so often that it would be virtually impossible for them not to take action if he is voted out.
The chances that the Letta government could stand without Berlusconi's forces are extremely slim.
There is no respite in sight: even if this crisis is somehow resolved, Berlusconi still has two more major legal cases on appeal, including one in which he was found guilty of an abuse of power and paying an under-age girl for sex. That verdict carries a lifetime ban from politics.