Italy Confronts Vacuum as Leaders Seek to Avoid Election

Italian political leaders sparred over forming a government after inconclusive elections fueled concern about the outlook for the euro region and the country’s deepening recession.

Beppe Grillo, whose anti-establishment movement was the top vote-getter in Italy’s election this week, rejected a call made yesterday by Democratic Party leader Pier Luigi Bersani to back a coalition. Grillo’s movement “must say what they want to do for this country and for their children,” Bersani said.

To have any chance to govern, Bersani’s bloc needs to bring Grillo into the process or join with former Prime Minister Silvio Berlusconi, who lost to Bersani by less than half a percentage point in the lower house. No coalition was able to obtain a majority in the Senate in the Feb. 24-25 vote. The prospect of a hung parliament and concern the country may need new elections roiled markets, with the benchmark FTSE MIB stock index falling almost 5 percent yesterday and bond yields rising.

Grillo, whose Five Star Movement has rejected allying itself with established parties, “won’t give any vote of confidence to the PD or others,” he wrote on his blog today. “It will vote on the laws that reflect its own program, no matter who puts them out. If Bersani wants to propose the abolition of public funding to parties including funds for the past election, we will vote in favor of it straightaway.”

Bersani’s junior ally Nichi Vendola said today after Grillo’s statement that his Left Ecology Freedom party rejects any prospect of a post-vote deal with Berlusconi. “I hope this is not Grillo’s wish,” he added. Berlusconi said in a video message on his party’s website today that “responsible parties can’t ignore governability” and need to agree on priorities soon to send a “message of stability.”

Yields, Rates

Italian bonds pared some of yesterday’s losses, with 10- year yields down 8 basis points, or 0.08 percentage point, to 4.81 percent as of 6 p.m. London time.

Italy managed to sell 6.5 billion euros ($8.5 billion) at a bond auction today as the inconclusive elections forced the Treasury to offer higher yields, fuelling an increase in demand for the debt.

The vote outcome raises the chance for prolonged political uncertainty, putting Italy’s sovereign credit rating at risk of a downgrade, Moody’s Investors Service said before the auction. Turmoil in Italy, the euro region’s third-largest economy and biggest bond market, risks spilling over into the currency bloc’s weaker sovereigns, including Portugal and Spain, “potentially reigniting the euro area debt crisis,” the rating company also said.

Italy will contract again this year and unemployment will continue to rise in 2014 to reach 12 percent, the European Commission forecast on Feb. 2. Italy’s gross domestic product will fall 1 percent this year after a 2.2 percent decline in 2012, the Brussels-based commission said.

Parliament’s Houses

An Italian government requires a majority in both houses, which have equal powers. Current rules make it difficult for a party to win both. In the Chamber of Deputies, the coalition gaining the most votes automatically gets 54 percent of the seats. The Senate is apportioned regionally, diffusing the bonus-premium effect. Bersani’s bloc took 345 seats in the 630- seat lower house and 123 seats in the 315-member Senate.

Grillo, whose group of lawmakers will include 54 senators and 109 members of the lower house, said today that Bersani is a “dead man talking” who should resign as leader of his party and stop making “indecent proposals” to the Five Star Movement.

“If Grillo has anything to say, insults included, I want to hear that in the Parliament,” Bersani replied in an e-mailed statement. “It is there that everyone should take on their responsibilities.”

‘Two Clowns’

Comments on Grillo, Berlusconi and the vote outcome by Peer Steinbrueck, the Social Democratic candidate to be Germany’s next chancellor, prompted Italian President Giorgio Napolitano to cancel a meeting with him scheduled for today during his visit to Germany, news agency Ansa reported.

In comments reported in German newspapers Steinbrueck said that he was “horrified that two clowns won the election.” Napolitano told journalists in Munich today that his comments were “totally out of place,” Ansa said. Speaking later in the day to an audience of Italians living in the southern region of Bavaria, Napolitano also said “we respect Germany, but we also expect respect.”

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net; Alessandra Migliaccio in Rome at amigliaccio@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

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