Napolitano Girds for Battle to Resolve Italy Election Impasse

President Giorgio Napolitano, a former communist resistance fighter who negotiated Silvio Berlusconi’s resignation, is preparing his final political battle as he seeks to steer Italy out of its latest government crisis before his term expires in May.

Napolitano, 87, is charged with resolving the political logjam caused by elections last month that produced a hung parliament. To avoid a new vote, he can try to forge a national-unity government, accept an administration without a majority or appoint a non-politician to head a so-called technical government, similar to that of Prime Minister Mario Monti.

Markets are pricing in two scenarios, “another technical government or the possibility, which is less and less likely, of a bipartisan government,” Mario Spreafico, who manages 1.5 billion euros ($1.95 billion) as chief investment officer at Schroders Private Banking for Italy, said in a phone interview. “Both would be temporary solutions” before new elections.”

The Feb. 24-25 ballot, which left front-runner Democratic Party leader Pier Luigi Bersani short of a majority in the Senate, has forced him to court the support of former comedian Beppe Grillo and his anti-establishment Five Star Movement, which won a quarter of the vote. Grillo responded by describing Bersani as a “dead man walking,” stressing his party would not give backing to any government. Italy’s 10-year bond yield has risen 21 basis points since the vote to 4.66 percent.

Bersani’s Options

That rejection leaves Bersani two options -- try to secure Napolitano’s blessing to form a minority government or he can seek to forge a broad coalition with three-time premier Silvio Berlusconi, who won a blocking minority in the Senate. The two did manage to collaborate in backing the Monti government for 13 months, though relations soured during the election campaign.

The chances the two could bury their differences were complicated by accusations last week by Senator Sergio de Gregorio that Berlusconi paid him 3 million euros to switch to Berlusconi’s party in 2006 and help bring down the government of Prime Minister Romano Prodi. Bersani served as Prodi’s industry minister.

Bersani told party leaders yesterday he wouldn’t seek the backing of Berlusconi and announced a limited legislative program in a bid to form a minority government. His proposals include easing austerity in favor of growth policies, stronger anti-corruption laws, more rigorous conflict-of-interest rules and steps to reduce the size and cost of government. Those initiatives would probably appeal to Grillo’s lawmakers, who campaigned against corruption and political waste.

Parliamentary Vote

Once given a mandate, Bersani would need to win a confidence vote in both houses of parliament. While Grillo’s lawmakers have ruled out backing Bersani, they have signaled they could walk out of the upper house for the vote, lowering the threshold for achieving a majority and indirectly allowing Bersani to be installed.

Such a maneuver could be complicated should the 117 senators of Berlusconi’s bloc do the same thing. That would mean that Grillo would have to send at least 13 Five Star’s lawmakers back into the Senate to reach the needed quorum for the vote, assuming all the other senators participate.

“This would square the circle of the maths giving birth to an extremely weak minority government between PD and Monti with some sort of external support from Five Star,” a team of analysts at Mediobanca Securities led by Antonio Guglielmi, said in a March 1 note to investors.

New Parliament

The new parliament is scheduled to meet for the first time on March 15 to elect presidents for both the Senate and the Chamber of Deputies. After that Napolitano will hold a round of consultations with parliamentary groups to gauge the chances of any of them being able to form a government. As Bersani’s coalition did win a majority in the lower house, he will probably get the first chance.

Should Bersani fail, Napolitano will probably reach out to a non-politician, Corriere della Sera reported March 5. Italy has a tradition of so-called technical governments. Monti was president of Bocconi University when Napolitano asked him to lead an administration of non-politicians.

Napolitano secured Berlusconi’s resignation in November 2011 as his parliamentary majority was disintegrating and after Italy’s 10-year bond yield hit a euro-era record 7.48 percent, fueling concern the country would follow Greece, Portugal and Ireland in needing a European Union bailout. Monti passed spending cuts, a pension overhaul and implemented tax increases that helped shore up the country’s finances and bring down borrowing cost, while fueling the popular anger that led to Grillo’s surge in support.

Limited Mandate

A new “technical” government would probably have a limited mandate, such as overhauling the country’s election law, which makes it difficult for any party to win in the Senate, before new elections could be held, Corriere reported.

Among the names circulating in the Italian press are outgoing Interior Minister Anna Maria Cancellieri, Development Minister Corrado Passera, Bank of Italy Governor Ignazio Visco and the central bank’s director general, Fabrizio Saccomanni. “From the point of view of the markets, certainly a technical government would be seen positively, even better if the prime minister is a senior official of the Bank of Italy,” said Raffaella Tenconi, economist at Bank of America Merrill Lynch.

New President

Napolitano is barred from calling a new vote. Under Italy’s Constitution, the president can’t dissolve parliament in the last six months of his mandate, meaning only the new president would be able to call elections. Given the divisions in the parliament, with Bersani, Grillo and Berlusconi each winning more than 25 percent, an agreement on a new president will be complicated.

During the first three votes for the presidency, a two-thirds majority is needed. From the fourth vote an absolute majority elects the head of state. Bersani’s bloc and Monti’s centrists would have enough votes to then win a majority, said Roberto D’Alimonte, a political science professor at Luiss University in Rome, for newspaper Il Sole 24 Ore.

“We hope such a majority won’t be used and Napolitano’s successor will be elected with” a broader consensus, he wrote in a March 2 article. “In any event, there’s a majority that can overcome a possible dangerous impasse that would end up further destabilizing an already uncertain scenario.”