Investors spooked by Italy election deadlock

Wednesday 27 February 2013

Political deadlock in Italy has driven down financial markets around the world as investors worried one of Europe's biggest economies would be unable to stay the course on austerity measures.

KEY PLAYER: Silvio Berlusconi's coalition did better than expected.

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James Mackenzie and Philip Pullella Rome

European leaders pleaded with politicians in Italy to quickly form a government to continue to enact reforms aimed at lowering the country's critically high debt and spare Europe another setback in its four-year financial crisis.

If the deadlock continues and parties fail to form a governing coalition, new elections will be required, causing more uncertainty and a leadership vacuum. German foreign minister Guido Westerwelle said: "What is now decisive for Italy is for a stable government to be formed as quickly as possible."The election results are a rejection of the tough austerity approach of the previous technocrat government led by Mario Monti. A centre-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament, while the Senate looks split with no party in control.Italy's FTSE MIB index was trading 4.7% lower. Some of its banking stocks were briefly suspended after precipitous falls at the bell. Whether the negative market reaction extends further into the week depends on how quickly a solution is reached.Silvio Berlusconi, the former Italian premier whose centre-right coalition did better than expected, insisted a government can be formed and called on Italians to ignore "crazy markets".He is a key player as his coalition is the second-biggest bloc in the upper chamber.Mr Berlusconi said: "Italy cannot be left ungoverned, we have to reflect." He said all parties needed to sacrifice something for the common good, but ruled out a coalition with Mr Monti.The worry across Europe, and in financial markets everywhere, is that Italy's appetite for reform may wane and its debt situation may deteriorate.European Commission spokesman Olivier Bailly said the EU expected Italy to honour its commitments on debt and deficit reduction and other reforms. Mr Bailly said: "We clearly hear the message of concern expressed by Italian citizens. The Commission has full confidence in Italian democracy and will work closely with the future government towards the relaunch of growth and job creation in Italy."French Finance Minister Pierre Moscovici said the result "creates problems" but would not undermine the European single currency.Fabio Fois, an economist at Barclays bank, said: "Political instability is likely to prevail in the near term and slow the implementation of much-needed structural reforms unless a grand coalition of centre-left, centre-right and centre is formed."Results in the Senate, where seats are awarded on a regional basis, indicated the centre-left would end up with about 119 seats, compared with 117 for the centre-right. But 158 are needed for a majority to govern.Any coalition administration that may be formed must have a working majority in both houses in order to pass legislation.Comedian Beppe Grillo's 5 Star Movement won the most votes of any single party, taking 25%, but he shows no immediate wish to co-operate with other groups.

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Investors spooked by Italy election deadlock

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