Italian Election Drives Uncertainty Back Into The Market

Italian showman Beppe Grillo gestures asOn Monday U.S. stock markets were rocked by volatility and wild swings throughout the trading day as investors digested the mercurial outcome of Italy’s general election that finally ended with the deep equity losses by over 1 percent on news of a government stalemate in the euro area’s third-largest economy.

Early exit polls on Monday initially showed that Pier Bersani’s Democratic party had secured a majority in the lower chamber, known as the Chamber of Deputies.

But later in the day it became clear that a majority in the first chamber is not enough because Silvio Berlusconi’s People of Freedom party was on track to gain a majority in the senate – the second chamber,  meaning that Berlusconi’s anti-austerity and anti-tax platform of People of Freedom party was positioned to create a political stalemate and prevent Bersani from pushing forward his own political agenda consisting of austerity tax reforms that former Italian Prime Minister Mario Monti had successfully secured with strong backing from the European Central Bank (ECB) and German Chancellor Angela Merkel, sending Italy’s 10 yr. bond yields down sharply from over 7 basis points in 2012 to 4 basis points today.

However, the latest election results of the Senate revealed today that there is no clear majority for one party to dominate or rule as a majority. Bersani’s Democratic Party captured 31.63 percent, Berlusconi’s People of Freedom party gained 30.72 percent, Beppe Grillo’s anti-establishment Five Star Movement had 23.79 percent, and Mario Monti’s Civic Choice Party gained 9.13 percent.

Forming a new government looks to be very difficult in the days ahead which means that uncertainty will be sticking around in 2013 until the next Italian election produces a new government. Coalescing  a new coalition is not likely to occur any time soon for any long-term functional Italian government.

Remarkably, Grillo’s Five Star Movement took 20 percent of the lower chamber and as much 23.79 percent of the senate, an impressive gain from a former comedian turned blogger who disapproves of Italy’s austerity reform package and has vowed to issue a referendum vote to determine if Italians should break away from the euro.

Italy is still firmly in recession with rising unemployment levels. The latest report from the European Commission reports that Italy will rise from 10.6% to 11.6% this year and keep increasing next year.

The European Commission also said in its last forecast that Italian gross domestic product (GDP) will drop 1% this year, compared to its earlier prediction of 0.5% in November.

Italy’s debt-GDP ratio is 127 percent this year, second highest only to Greece’s in the euro-area and up from the level of 120.1 percent in 2011, when technocrat Mario Monti took over the reigns from Silvio Berlusconi who resigned in 2011, after the country’s bond yields hit an unsustainable level, above 7 percent.




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