Inconclusive Italian elections roil European financial markets

Giovanni Orsina, a professor at Luiss Guido Carli University, discusses the Italian parliamentary election results and the prospects for a second round of voting. Source: Bloomberg (Bloomberg)
February 26, 2013

Highly inconclusive Italian election results rekindled fears of more debt troubles in Europe on Tuesday, slamming stock markets and sending fresh jitters through global commodity and bond markets.

Italian voters delivered a stinging rebuke to the nation’s political class and to the painful economic austerity measures meant to bring down the crushing debt in the euro zone’s third-largest economy. With no single political force winning a clear path to a majority in both of Parliament’s chambers, politicians in Rome began arduous talks to form a government. Most scenarios were viewed as leading to a weak coalition vulnerable to a quick fall.

The vote, held Sunday and Monday, underscored the still-volatile nature of Europe’s debt crisis. Economists said the chaotic political outlook in Italy raised the prospect that deeper economic turmoil would again take root.

“We believe the likelihood of Italy entering a financial assistance program has increased as a result of the electoral outcome,” Citibank’s London research arm said Tuesday in an investment note.

The key index in Milan fell by 4.4 percent in midday trading Tuesday, with bank stocks particularly feeling the pain. Italian borrowing costs jumped to three-month highs, and those of other troubled European economies, including Spain and Portugal, also spiked.

Across the continent, market sentiment turned negative. London’s FTSE 100 fell 1.28 percent, the Paris CAC 40 dropped more than 2 percent, and the key index in Frankfurt was off by more than 1.8 percent. The declines followed drops overnight in Tokyo and Hong Kong. At the same time, investors drove up the price of safe-haven gold and pushed down oil prices on fears of lower economic growth.

Concern was fueled by the likelihood of a political vacuum in Italy for some time to come. The Five Star Movement of comedian turned politician Beppe Grillo, who has called for a referendum on Italy’s membership in the euro zone and a renegotiation of its debt, bested all predictions by landing 25.55 percent of the vote. The center-left party of Pier Luigi Bersani polled substantially lower than expected, securing enough votes for a majority in the lower house but failing to gain a majority in the Senate.

Meanwhile, the center-right coalition of former playboy prime minister Silvio Berlusconi — under whom Italy became entangled in a deep financial crisis — did far better than expected. Voters apparently were responding to his promise to roll back harsh austerity measures, which have been seen as restoring investor faith in the country at the price of sending it into a recession with no end in sight.

The last-minute coalition put together by Mario Monti, the former interim prime minister and architect of the Italian austerity program, came in a distant fourth.

“As we feared, the Italian election resulted in a hung parliament,” said Anatoli Annenkov, an economist with SG Global Economics in London. “Now starts the formidable challenge of forming a government. The Five Star Movement led by Mr. Grillo was the big winner and will need to decide whether to support the center-left in the Senate. Judging by the party’s anti-establishment rhetoric, this seems unlikely.”

Anthony Faiola is The Post's Berlin bureau chief. Faiola joined the Post in 1994, since then reporting for the paper from six continents and serving as bureau chief in Tokyo, Buenos Aires, New York and London.
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