Challenge of forming coalition government in Italy: protest vote against austerity measures

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Democratic Party leader Pierluigi Bersani leaves after a press conference in Rome, Tuesday Feb. 26, 2013. Italy emerged from elections Tuesday with no clear winner, driving markets around the world markedly lower as investors worried that one of Europe's biggest economies would be unable to build a governing coalition that can stay the course on unpopular austerity measures. A day after polling ended, a few seats in Parliament based on Italians' voting abroad still remained to be decided, but their numbers won't ease the gridlock. (AP Photo/Alessandra Tarantino)

ROME - A centre-left group of parties appears to have the best shot at forming a coalition government in Italy after an inconclusive national election, but the challenge is steep and comes amid public anger over austerity measures.

If Italian parties fail to form a governing coalition, new elections would be required, causing more uncertainty and a leadership vacuum, and that possibility rattled financial markets across Europe on Tuesday. In early Wednesday trading in Milan, the FTSE MIB rebounded 0.5 per cent even though the country had to pay higher borrowing costs in a pair of bond auctions. The index has a long way to go to recoup the previous day's 4.9 per cent fall though.

Pier Luigi Bersani and his centre-left allies appeared on Tuesday to have won a narrow victory in the lower house of parliament, while the Senate looks split with no party in control. Silvio Berlusconi, the former Italian premier whose centre-right coalition did better than expected, is a key player since his coalition is now the second-biggest bloc in the upper chamber.

Comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalized on a wave of voter disgust with the ruling political class, had a surprisingly strong showing. His bloc of seats in Parliament could prove crucial in making any coalition government viable.

The two-day election on Sunday and Monday also was a clear rejection of the previous technocratic government led by Mario Monti. That government enacted wide-ranging reforms to the budget and the economy. Though its borrowing rates have fallen in financial markets, the cost to Italians has been high, with Italy mired in recession and unemployment on the rise.

Berlusconi has already ruled out an alliance with Monti, his predecessor, whom he blamed for driving Italy deeper into recession.

On Tuesday, a few seats in Parliament based on Italians' voting abroad still remained to be decided, but their numbers won't ease the gridlock. European leaders pleaded with politicians in Italy to quickly form a government to continue to enact reforms to lower Italy's critically high debt and spare Europe another spike in its four-year financial crisis.

Bersani said he was not opening talks with any potential partners until he submits his program to Italy's president, who taps a candidate to form a government.

Stinging from a loss of some 4 million votes compared to the last election in 2008, Bersani hasn't yet identified who he could try to form alliances with. But top officials in his Democratic Left (PD) party were quick to rule out any deal with Berlusconi.

"As far as I go, absolutely not," Stefano Fassina, a PD official, said of a possible Bersani-Berlusconi alliance.

Whether Tuesday's negative market reaction extends further into the week may hinge on how quickly a solution is reached in Italy.

Berlusconi insisted that a government can be formed and called on Italians to ignore the "crazy" markets.

"Markets go their own way. They are independent and also a little crazy," Berlusconi said, adding that a government can be cobbled together, if rival politicians are willing to "make some sacrifices."

Grillo said his forces would seek to thwart any Bersani-Berlusconi deal. Raising the spectre of early elections, he predicted any such coalition will "last seven, eight months. The economy won't let them escape."

Bersani himself later made subtle overture toward Grillo's forces, conceding that the centre-left campaign had not gone deep enough for change. "We finished first, without winning," he conceded.

Italy is hugely important for the future of the euro, and its apparent stability over the past six months has been one of the reasons that concerns over the currency have eased. Of the 17 European Union countries that use the euro, Italy has the second-highest debt burden as a proportion of its gross domestic product, at 127 per cent.

Only Greece's is higher. Italy has to spend around €80 billion a year just to service its debt.

The worry across financial markets is that Italy's appetite for reform may wane and its debt situation may deteriorate.

That was evident in a pair of bond auctions Wednesday. Though it raised €6.5 billion it had to pay higher interest rates to get investors to part with their cash. The country sold 10-year bonds at a yield of 4.83 per cent, way up from 4.17 per cent last month. The yield on five-year bonds rose to 3.59 per cent from 2.94 per cent.

Though Italy's annual borrowing — its budget deficit — is relatively small compared with other euro countries at 3 per cent of its annual gross domestic product, its overall debt stands at a colossal €2 trillion.