Italian Treasury Gauges Investor Reaction to Vote With Bill Sale

Italy is set to gauge investor reaction to elections that produced a hung parliament and threaten another vote this year.

The Rome-based Treasury will auction 8.75 billion euros ($11.4 billion) of six-month bills today and return to market tomorrow with the sale of as much as 6.5 billion euros of five-and 10-year bonds.

Pre-election favorite Democratic Party leader Pier Luigi Bersani barely won in the Chamber of Deputies, squeaking by with a margin of less than half a percentage point over former Prime Minister Silvio Berlusconi. While Italy’s voting rules award him a majority of the 630 seats in the Chamber, Bersani will fall short of controlling the Senate even if he strikes a post-election alliance with outgoing Prime Minister Mario Monti.

The euro fell to a six-week low, Italian bonds declined and U.S. Treasury notes rose as the results came in pointing to a hung-parliament. Italy has Europe’s second-biggest debt after Greece at more than 120 percent of gross domestic product and the Treasury needs to sell more than 30 billion euros of bonds and bills a month.

“Ethically, politically, ideologically and personally there is no way that a lasting coalition can be formed, so new elections seem inevitable,” James Walston, a politics professor at Rome’s American University, said by e-mail.

Berlusconi’s People of Liberty party refused to concede and called for a recount, possibly leading to heightened political tensions in the coming weeks.

Seat Count

Bersani’s bloc and Monti together would get 135 seats in the 315-seat Senate, while Berlusconi’s coalition and the party of comic-turned politician Beppe Grillo would have 117 and 54 senators respectively, according to Bloomberg calculations based on Senate votes that don’t take into account six senators elected by Italians abroad.

This may force Bersani to try to seek the support of Grillo’s anti-establishment party or try to build up a so called grand coalition. Should he fail to assemble a government, Italy’s President Giorgio Napolitano may appoint a caretaker premier to pass urgent reforms or call new elections.

Should the older parties fail to address the issues, the in the next election “the populists will do even better, the cost of Italy’s debt will spiral out of control and the whole euro system will be threatened,” Walston said.

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