Italy’s elections: risk is underestimated in the market, banks warn

Various exit polls after the parliamentary elections in Italy caused markets to fluctuate strongly on Monday, when initial news suggested that Pier Luigi Bersani’s centre-left alliance might have enough votes for a majority in both chambers of the parliament.

According to analysts at Credit Suisse, this caused Italian and European peripheral bonds and equities to rally strongly and the euro to gain.

Later, polls showed that former prime minister Silvio Berlusconi might get most seats in the Senate and the market moves were reversed.

Markets are now concerned that a stable government cannot be formed and uncertainties could persist for a few weeks, as the new parliament is not scheduled to formally gather before mid-March and some Italian politicians already suggest that a new round of elections might be required.

“While Mr. Bersani’s centre-left coalition gained the majority in the lower house, as we expected, Mr. Berlusconi’s coalition won most seats in the upper house, followed by the center-left and by comedian Grillo’s party. Due to a dismal result for Mr. Monti’s party, the hoped-for coalition between Mr. Monti and Mr. Bersani will not have a majority,” the bank said.

A research note published by Morgan Stanley today confirmed that Italian elections resulted in a hung parliament.

“The first indications, with 55% of the votes counted so far in the Senate, point to a great degree of uncertainty, with the centre-right and the Five Star Movement having performed better than expected. While a Bersani-Monti alliance that should ensure an absolute majority in the both chambers is possible, we do not take this for granted,” Morgan Stanely said.

As such, compared to more uncertain options, a Bersani-Monti alliance could present a positive outcome in the near term, given the parties have declared their commitment to fixing some of Italy’s structural problems.

Conversely, the bank would view an uncertain situation, perhaps leading to new elections in a few months, as negative.

But such a fragmented and heterogeneous parliament points to a degree of political fragility.

“We’re cautious about Italy’s ability to implement deep reforms, and think that such risk is underappreciated in the market,” the bank said.

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