- The election results show that Bersani has won the lower house but no coalition will be able to form a majority in the senate.
- In this unfortunate situation, the Italian president can install an interim government. Election laws may then be revised and new elections will be held.
- The first real test of investor confidence will come tomorrow when Italy auctions as much as EUR6.5bn in five- and 10-year bonds.
Monday evening nervousness about the outcome of the Italian elections caused markets to turn negative after initial relief when the first opinion polls showed a fairly strong win to Bersani’s centre-left coalition.
The election results now show that Bersani has won the lower house where the biggest coalition automatically gets at least 54% of the seats (340 out of 630 seats) with a narrow margin. However, no coalition will be able to form a majority in the senate. A majority is needed in both chambers to form a stable government.
In the senate, Bersani only got 121 seats out of 315 and Monti as few as 22 seats – i.e. a Bersani-Monti coalition is quite far from having a majority in the senate. Berlusconi and Grillo’s five-star movement did better than expected and got as many as 117 and 54 seats respectively out of 315 seats. Grillo got as much as 25% of the votes for the lower house.
In this unfortunate situation the Italian president can install an interim government. Election laws may then be revised and new elections will be held. This will create a lot of uncertainty and as a minimum put reforms on pause until new elections can be held and a new government formed, which could easily take three months or more. Bersani may also try to form a government but this would almost certainly be short-lived.
The election results show that the majority of Italians do not want more reforms. This is pretty alarming as structural reforms are much needed. Italy has failed to grow for a decade partly due to a lack of structural reforms.
Markets are likely to be nervous until the consequences of the election result are known. The uncertainty about the political situation in Italy and the clear signal that Italians are unwilling to undertake necessary reforms should put pressure on Italian government bond spreads, Italian equities and EUR/USD. The negative sentiment is likely to spread wider, reflecting 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 backstop. But there are limits to the ECB’s patience. If the Italian people choose a no reform path they can hardly expect the ECB to make their life easy. There will not be any help from the ESM and ECB without reform promises.
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 interest from foreign investors is likely to be limited but Italy normally has a strong domestic investor base.
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