Investors to Prompt Berlusconi-Bersani Deal, Polillo Says

Italy is headed for a broad coalition government as bondholders pressure Pier Luigi Bersani and Silvio Berlusconi to set aside their rivalries and form a partnership, said Finance Undersecretary Gianfranco Polillo.

A joint government between Bersani’s Democratic Party and the forces led by Berlusconi, a three-time former premier, is “the only possible way,” Polillo said late yesterday in a telephone interview.

Italian yields surged after elections Feb. 24-25 delivered a four-way parliamentary split and cast doubt on the stability of the next government. Bersani, the top vote getter, has resisted engaging Berlusconi and said he would seek to hammer out a compromise with lawmakers elected under the upstart political movement of ex-comic Beppe Grillo. Polillo, a former adviser to a Berlusconi ally, said this strategy wouldn’t work.

“I don’t think it’s possible to expose a government to the caprice of parliamentary calculations in a situation of great difficulty like this one, in which the first thing markets look at is the governability of a country,” said Polillo “Markets won’t sit by and watch our little games.”

Polillo has served the apolitical government of unelected Prime Minister Mario Monti since November 2011. He previously was adviser to the head of Berlusconi’s People of Liberty party in lower house of parliament. Monti finished fourth in the election.

Italian 10-year yields dropped 5 basis points to 4.7 percent at 11:20 a.m. in Rome, after rising about 30 basis point since before the election.

Under Pressure

Bersani is under pressure to provide Italy with a stable government to pull the economy out of an 18-month recession and help the country service its $2.6 trillion debt. Bersani’s options were curtailed yesterday when Grillo, whose anti-austerity 5 Star Movement will have the third-biggest parliamentary representation, spurned his offer to make an alliance.

Grillo told the BBC yesterday he expected Bersani and Berlusconi’s forces to strike a deal and that Italy will hold new elections within a year because the partnership won’t last. Giovanni Carlo Cancellieri, one of his allies from Sicily, told Canale 5 today Grillo could be convinced to change his mind and back a government led by Bersani.

Stability Crucial

European Union leaders, including Olli Rehn and German Foreign Minister Guido Westerwelle, have said this week that government stability in Italy is crucial to the region. Moody’s Investors Service said in a report yesterday that gridlock risks re-igniting the euro-area’s debt crisis as turmoil in the currency bloc’s third-largest economy risks spilling over into weaker sovereigns like Portugal and Spain.

Italy’s borrowing costs rose to the highest in four months at an auction of a new 10-year bond yesterday in Rome. Yields advanced to 4.83 percent from 4.17 percent at an auction of similar-maturity debt on Jan. 30, even as demand increased from investors attracted by higher returns.

Bersani and Berlusconi, whose respective parties have battled for power in Italy for the last two decades, struck a temporary truce in November 2011 to bring Monti to power. While that alliance was unwound during the two-month election campaign, the risk of a surge in borrowing costs will force the two to restore their partnership, Polillo said.

Market Risk

“We will most likely be pushed into that situation by an emergency,” he said. “When in one week’s time we’re still up to our necks trying to form a government how do you think the markets are going to react?”

Economic realities will pave the way for Italian politicians to break out of the nation’s post-election gridlock, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development.

“Once you are in power, it’s very straightforward,” Gurria told reporters today in Helsinki. “You have much less room to maneuver than what the campaigns would suggest.”

(Updates with bond yields in six paragraph, Grillo’s ally in eighth, Gurria in 13th and 14th. For more news on the Italian election, click here.)
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