March 7 (Bloomberg) -- Below are some possible scenarios and some frequently asked questions about the formation of the new Italian government following the inconclusive vote on Feb. 24-25. Pre-election favorite Democratic Party leader Pier Luigi Bersani won the lower house by less than a half percentage point, while falling short of a majority in the Senate.
Anti-establishment 5 Star Movement led by former comedian Beppe Grillo captured more than a quarter of the popular vote. Grillo and former three-time premier Silvio Berlusconi both won a blocking minority at the Senate.
What happens now?
-- The new parliament is scheduled to meet for the first time on March 15 to begin electing presidents for both the Senate and the Chamber of Deputies. This normally takes three to four days.
How is the prime minister designated?
-- Once the leaders of parliament are in place, the president of the republic holds a round of consultations with political leaders. He can then give a mandate to someone, usually the head of the coalition winning the most votes in the Chamber of Deputies, to try to form a government. That leader then can assess if he can win a majority in both chambers before accepting the mandate.
-- If that leader fails to assemble a majority, the president can give the mandate to someone else, even a non-politician. If no one is in a position to assemble a majority, the president can call early elections. The president can’t dissolve parliament in the last six months of his mandate, which applies to President Giorgio Napolitano, whose term ends in May.
-- If the designated leader is able to build a majority, he can accept the mandate and is sworn in as prime minister. Confidence votes are then held within 10 days in both houses to install the government. It can take a month from the election before a government is formed. Napolitano has signalled so far that it would be better to avoid a new vote and he won’t appoint a prime minister unless he believes there is a majority after consulting with parliamentary groups.
What are the possible scenarios?
-- A broad coalition including Bersani’s Democratic Party (PD) and Berlusconi’s People of Liberty party (PDL). The PD has ruled out a pact alliance with Berlusconi, who said parties need to agree on reforms and send a message of stability.
-- Minority government: Bersani, who’s said he has the right to get the first chance, is given an exploratory mandate from Napolitano to form a government and seeks support from other political forces in parliament on a program of reforms. Grillo has said his party won’t back any political government and would weigh support on legislation vote by vote. Bersani, once sworn in, could win external support from Grillo in the Senate’s confidence vote, which would lead to a minority government. Prime Minister Mario Monti has said his bloc would only support governments committed to European Union discipline.
-- Non-Politician: Napolitano after consultations acknowledges Bersani doesn’t have enough support and passes the mandate to a non-politician. Napolitano could also reach out to a non-politician should Bersani lose a confidence vote. Napolitano engineered the current technical government, asking Monti to step in when Berlusconi resigned in November 2011. Monti’s administration was backed by Bersani, centrist parties and Berlusconi, until the latter withdrew support in December. Outgoing Interior Minister Anna Maria Cancellieri, Development Minister Corrado Passera and Bank of Italy Governor Ignazio Visco have been identified in Italian newspapers as possible candidates. Grillo has already also said his party won’t support any government, whether led by a politician or an outsider.
-- New elections: Napolitano, whose mandate expires on May 15, resigns early and Monti remains in office until a new president is elected and a new premier appointed. The new president would begin consultations and could dissolve parliament and call elections. The Italian constitution bars the president from calling elections in the last six months of his term, meaning Napolitano can’t call a new vote.
-- Extension of Monti: Consultations between the new president and political parties, for which there are no time limits, are extended and Monti remains in power for a few months until a solution is found. This option, called “prorogatio” in Latin, wouldn’t require a confidence vote. Monti, who said it’s up to Napolitano to decide, would have limited powers, while parliament would have full legislative powers. The Dini government in 1996 remained in charge for 127 days under a prorogatio.
Why is the confidence vote crucial?
-- Any government, including non-political governments, must win confidence votes in both chambers to come into power.
-- Bersani’s bloc won 345 deputies out of 630 in the lower house, meaning it will win a confidence vote in the chamber.
-- In the 315-seat Senate, where no coalition obtained a majority, winning a confidence vote is more difficult because abstentions are counted as no votes. The designated premier needs to win support of a majority of senators present. The minimum threshold needed to hold a vote is half of senators, including four senators for life, plus one, excluding those on leave or absent for justified reasons.
-- Bersani could win a confidence vote if Grillo’s 54 senators walked out of the Senate, lowering the needed majority. He would still need support from Monti’s 19 senators. Grillo’s senators-elect have signaled they may use this strategy if a Bersani legislative program is acceptable to the 5 Star Movement. If Berlusconi’s senators leave the Senate as well, there wouldn’t be a quorum, preventing a vote. In that case Bersani would need about 13 other senators, possibly Grillo’s, to enter the Senate. Normally if the quorum isn’t reached after a few attempts the session is suspended and rescheduled. Still, in this case it would clearly indicate Bersani is unable to form a government.
When will the new president of the republic be elected?
-- President Napolitano’s term expires on May 15 and under Italy’s constitution, both houses of parliament must meet April 15 to elect his successor. Three delegates per regional assembly, for a total of 58, are also eligible to vote, bringing the total to about 1,000 delegates.
-- The election, which can take a few days, is held in a roll call vote. To win in the first three rounds a candidate must secure two-thirds of votes. From the fourth round an absolute majority is enough for victory.
-- The election of the president is normally part of negotiations among political parties. A compromise may be more difficult to reach this time given that any alliance may be short-lived. Bersani’s bloc, including ally Nichi Vendola, and Monti’s centrists have enough delegates to elect a new president from the fourth round, according to calculations by Luiss professor Roberto D’Alimonte for newspaper Il Sole 24 Ore.
What are markets expectations?
-- A return to the polls in the near term is “unlikely as the mainstream parties will not risk giving the 5 Star Movement an opportunity to increase its popularity further,” Eurasia Group analysts Wolfango Piccoli and Peter Ceretti said in a note Feb. 26. Bersani “will most likely receive a mandate to try to form the next government,” while a grand coalition or a minority government will hardly make any meaningful progress on structural reforms, they said.
-- A temporary grand coalition is “the most market-friendly scenario,” Barclays Plc economists including Fabio Fois and Giuseppe Maraffino wrote in a March 1 note. New elections might be held by the end of this year, beginning of next, they said. A Bersani government backed by “tacit” Grillo support would help Italy escape the uncertainty related to new elections, while it might hinder progress on structural reforms, they said. New elections under the current law would be “the least favorable outcome.” A deterioration of sentiment leading to a bailout request from Italy is unlikely, they said.
-- The probability of a broad coalition is 70 percent, Mediobanca analysts led by Antonio Guglielmi said in a note Feb. 26. A Bersani-led government with the support of Grillo has 15 percent probability, Mediobanca said, while new elections are only 11 percent likely. “Any PD-PDL government would be short lived with or without contribution from Monti,” they said.
-- The most likely outcome “is that some type of elected or unelected caretaker government will be formed to deliver a narrow remit in advance of a second election later this year,” Capital Economics said in a March 5 note. Bond yields will probably continue to rise, due to further likely fiscal slippage and the possibility of more populist economic policies eventually being adopted, they said.
-- Goldman Sachs Group Inc.’s “baseline case is the formation of an institutional government supported by a broad coalition of political forces,” according to a March 6 note. A new vote could take place in June 2014, to coincide with the European Parliament elections, they said. A PD-led government with external support from Grillo is “slightly less likely and less positive” for government bonds.
-- There’s a chance that PD and 5 Star Movement can reach a deal to enable creation of another technocratic government in Italy, Medley Global Advisors said in a client note March 5.
What to watch:
-- Monti has invited Bersani, Grillo and Berlusconi to his office in Rome for “an exchange of opinion” before the March 14 meeting of the European Union council. This may also be a chance to discuss possible strategies and alliances.
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