World markets retreated Tuesday as a big vote for anti-austerity parties in Italy's elections left the eurozone's third biggest economy in political deadlock, sparking fears of a revival of the region's debt crisis.
European stock markets were sharply lower, led by a 4% plunge on Italy's index of leading shares. Italy's borrowing costs increased, as the yield on its 10-year bond moved up towards 5%, triggering similar moves in other weaker eurozone states such as Spain and Portugal. The euro fell to just above $1.30.
Final results showed the center-left coalition of Pier Luigi Bersani winning by a very slim margin in the lower house of parliament but unable to control the Senate after a strong showing by former Prime Minister Silvio Berlusconi and a protest movement led by comedian turned politician Beppe Grillo.
Mario Monti, the former head of a technocrat government which steered Italy through the worst of the eurozone crisis last year, trailed badly in fourth place.
"Italy's election looks set to deliver some of the worst-case outcomes that markets had feared but had largely ruled out as unlikely," noted Shahab Jalinoos, a strategist at Swiss bank UBS.
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Why Europe Just Got Its First 'Rebellion' Of The Crisis Era
The most dramatic moment in last night's Italian election came from the second in command in the center-left PD party.
He announced to a room of reporters that voters had staged a "rebellion" and that the country would likely be ungovernable.
That "rebellion" was ultimately against outside powers (Angela Merkel, the ECB, the markets even) who have pushed austerity on Italy.
And the rebellion took the shape of big support in favor of protest candidates.
One weird thing is that it didn't happen sooner.
Italy's election mess won't knock out Europe
Italy is poised for months of political uncertainty and a new election within a year as it deals with the inconclusive outcome of this week's vote. But as long as an interim government leaves previous reforms in place, it's unlikely to tip Europe back into crisis.
Italian voters delivered a shock late Monday, handing a narrow victory to the center-left coalition of Pier Luigi Bersani in the lower house but backing populist anti-austerity campaigns led by former Prime Minister Silvio Berlusconi and comedian Beppe Grillo in greater numbers than expected, creating a hung parliament in the Senate.
Investors and Italy's European partners had been hoping Bersani would build a new coalition government with former Prime Minister Mario Monti, who hauled the eurozone's third biggest economy back from the brink of collapse last year with a series of painful tax increases and spending cuts.
The election result pushed world stocks lower and increased borrowing costs for Italy and other heavily indebted eurozone states. But while the uncertainty will add to market volatility, a combination of Monti's reforms and the European Central Bank's untested and conditional pledge to buy the bonds of ailing eurozone states could still give Italy enough time to elect a stable government.