ROME (Reuters) - The Italian stock market fell and state borrowing costs rose on Tuesday as investors took fright at political deadlock after a stunning election that saw a comedian's protest party lead the poll and no group secure a clear majority in parliament.
“The winner is: Ingovernability” ran the headline in Rome newspaper Il Messaggero, reflecting the stalemate the country would have to confront in the next few weeks as sworn enemies would be forced to work together to form a government.
In a sign of where that might lead, former prime minister Silvio Berlusconi indicated his center-right might be open to a grand coalition with the center-left bloc of Pier Luigi Bersani, which will have a majority in the lower house thanks to a premium of seats given to the largest bloc in the chamber.
Results in the upper house, the Senate, where seats are awarded on a region-by-region basis, indicated the center-left would end up with about 119 seats, compared with 117 for the center-right. But 158 are needed for a majority to govern.
Any coalition administration that may be formed must have a working majority in both houses in order to pass legislation.
Comedian Beppe Grillo's anti-establishment 5-Star Movement won the most votes of any single party, taking 25 percent. He shows no immediate inclination to cooperate with other groups.
Despite talk of a new election, the main established parties seem likely to try to avoid that, fearing even more humiliation.
World financial markets reacted nervously to the prospect of a stalemate in the euro zone's third largest economy with memories still fresh of the crisis that took the 17-member currency bloc to the brink of collapse in 2011.
In a clear sign of worry at the top over what effect the elections could have on the economy, Prime Minister Mario Monti, whose austerity policies were repudiated by voters, called a meeting with the governor of the central bank, the economy minister and the European affairs minister for later on Tuesday.
Other governments in the euro zone sounded uneasy. Allies of German Chancellor Angela Merkel made no secret of disappointment at Monti's debacle and urged Rome to continue with economic reforms Berlin sees as vital to stabilizing the common currency.
France's Socialist finance minister also expressed “worry” at the prospect of legislative deadlock in Italy but said that Italians had rejected austerity and hoped Bersani's center-left could form a stable government to help foster growth in Europe.
Fabio Fois, an economist at Barclays bank, said: “Political instability is likely to prevail in the near term and slow the implementation of much needed structural reforms unless a grand coalition among center-left, center-right and center is formed.”
Berlusconi, a media magnate whose campaigning all but wiped out Bersani's once commanding opinion poll lead, hinted in a telephone call to a morning television show that he would be open to a deal with the center-left - but not with Monti, the technocrat summoned to replace him in a crisis 15 months ago.
“Italy must be governed,” Berlusconi said, adding that he “must reflect” on a possible deal with the center-left. “Everyone must be prepared to make sacrifices,” he said of the groups which now have a share of the legislature.
The Milan bourse was down more than four percent and the premium Italy pays over Germany to borrow on 10-year widened to a yield spread of 338.7 basis points, the highest since December 10.
At an auction of six-month Treasury bills, the government's borrowing costs shot up by more than two thirds. Investors demanded a yield of 1.237 percent, the highest since October and compared to just 0.730 percent in a similar sale a month ago.
Berlusconi, who was forced from office in November 2011 as borrowing costs approached levels investors feared would become unsustainable, said he was “not worried” about market reaction to the election and played down the significance of the spread.
The poor showing by Monti's centrist bloc reflected a weariness with austerity that was exploited by both Berlusconi and Grillo; only with the help of center-left allies did Bersani beat 5-Star, by just 125,000 votes, to control the lower house.
The worries immediately went beyond Italy's borders.
“What is crucial now is that a stable functioning government can be built as swiftly as possible,” said German Foreign Minister Guido Westerwelle. “This is not only in the interests of Italy but in the interests of all Europe.”
The euro skidded to an almost seven-week low against the dollar in Asia on fears about the euro zone's debt crisis. It fell as far as $1.3042, its lowest since January 10.
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