In terms of the election, Pier Luigi BersaniaEUR(TM)s Italia Bene Comune coalition will have a majority in the lower house (Camera) of parliament, but not in the Senate. A possible alliance with former Prime Minister MontiaEUR(TM)s colaition, Con Monti Per LaEUR(TM)Italia, would still leave the two leaders around 15 seats shy of a 158-seat majority. Attracting others to build a majority could proceed in several directions with even the possibility of a aEURoeGrand Coalition.aEUR?
If a grand coalition is formed in the next several weeks, its first task will likely be to elect a new Presidente della Repubblica by April 15. Many political analysts believe a new president will need to call new elections. However, there is a reasonable chance that an effort will be made to change the current byzantine election law before new elections, thus delaying them until at least October.
The surprise performance by Beppe Grillo (two full standard deviations removed from the final pre-election poll) and the disappointing performance by Mario Monti clearly signal an anti-austerity message from voters. The election further signifies the rise of anti-establishment sentiment and increased skepticism towards European obligations, making crisis management more difficult.
All of this could lead to wider and more volatile government bond spreads in the coming weeks and months. Moreover, a weak macro-environment does not bode well for equities. If such a scenario does unfold, ItalyaEUR(TM)s political leadership in whatever form probably will need financial assistance from programs like ESM, although unsettled politics would almost certainly delay any agreement.