- Hung parliament in Italy and already discussions that re-election is needed and that election laws need to be changed.
- Fears that the debt crisis might be reignited could potentially resurface. Strong negative opening for European bourses expected this morning.
The outcome of the Italian elections caused global financial markets to turn negative yesterday afternoon after an initial relief when the first opinion polls showed a fairly strong win to the pre-election favourite Pier Luigi Bersani and his centre-left coalition. But, as the counting proceeded throughout the day, it became more and more clear that Bersani had only won the lower house with a small margin of less than half a percentage point over former Prime Minister Berlusconi. However, as the biggest coalition automatically gets at least 54% of the seats (340 out of 630 seats) it should itself not be enough to create a political deadlock. Importantly, Bersani’s popular victory was not enough for his centre-left coalition to secure a majority in the regional elected Senate. In fact, neither Bersani’s centre-left coalition nor Berlusconi’s centre-right coalition were even close to securing a majority in the Senate. See Flash comment on election here.
The Italian election result means that financial markets in Europe this morning are waking up to a hung parliament in Italy and a situation where the Italians have shown a big discontent with the austerity measures introduced by technocrat Mario Monti. Monti experienced a very weak election result getting less than 10% of the popular vote, whereas the populist, anti-austerity and comedian Grillo and his five-star movement managed to attract more than 25% of the votes. The hung parliament was probably the worst outcome one could think of from a market perspective. The president can now decide to install an interim government if a government (grand coalition) cannot be formed. Election laws may then be revised and new elections will be held. But no doubt this will create a lot of uncertainty going forward and as a minimum put reforms on pause until new elections have been held and a new government formed. It could easily take three months or more and there is certainly no guarantee that e.g. Grillo and his anti-austerity movement will not gain further in the popular vote.
Financial markets have already reacted to the uncertain situation in Italy. EUR/USD has dipped to 1.3050 after trading briefly above 1.33 yesterday afternoon. The bund future rallied in the evening and global equity markets are all in the red with S&P500 down close to 2% and Nikkei down close to 2.5% this morning. Peripheral government bonds – not least Italians – are expected to suffer further this morning. There is an Italian six-month bill auction today but the first real test of investor confidence will come tomorrow when Italy auctions as much as EUR6.5bn in five- and 10-year bonds. The negative sentiment could easily intensify on concerns that this could be a prelude to a re-ignition of the debt crisis. We still believe that the ECB’s OMT programme is in place as a strong backstop but there are limits to the ECB’s patience if Italy chooses a no-reform path.
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