Global markets drop with no clear winner in Italian elections

Italy emerged from elections Tuesday with no clear winner, driving markets around the world markedly lower as investors worried that one of Europe's biggest economies would be unable to build a governing coalition that can stay the course on unpopular austerity measures.

A day after polling ended, a few seats in Parliament based on Italians' voting abroad still remained to be decided, but their numbers won't ease the gridlock. European leaders pleaded with politicians in Italy to quickly form a government to continue to enact reforms to lower Italy's critically high debt and spare Europe another spike in its four-year financial crisis.

If Italian parties fail to form a governing coalition, new elections would be required, causing more uncertainty and a leadership vacuum.

"What is now decisive for Italy — but, because Italy is such an important country for Europe, also for the whole of Europe — is that a stable government that is capable of acting can be formed as quickly as possible," German Foreign Minister Guido Westerwelle told reporters in Berlin.

The results of the election are a rejection of the tough austerity approach of the previous technocratic government led by Mario Monti. A center-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament, while the Senate looks split with no party in control.

Italy's FTSE MIB index was trading 3.8 percent lower at 15,731, having earlier been nearly 5 percent down at one point Tuesday. Some of its banking stocks were briefly suspended after precipitous falls at the bell.

The interest rate on the country's benchmark 10-year bond — an important gauge of investor sentiment — rose by 0.33 percentage points to 4.77 percent. Investors sought protection in the bonds of more stable and prosperous economies, such as German government bonds.

Whether Tuesday's negative market reaction extends further into the week may hinge on how quickly a solution is reached in Italy. Despite the uncertainty, Italy's Treasury managed to sell €8.75 billion ($11.75 billion) of short-term debt though at a higher cost.

Silvio Berlusconi, the former Italian premier whose center-right coalition did better than expected, insisted that a government can be formed and called on Italians to ignore the "crazy markets." Berlusconi is a key player as his coalition is now the second-biggest bloc in the upper chamber.

"Markets go their own way. They are independent and also a little crazy," he said, adding that a government can be cobbled together if rival politicians are willing to "make some sacrifices."

Stinging from a loss of some 4 million votes compared to the last election in 2008, Bersani hasn't yet identified potential coalition partners. But top officials in his Democratic Left (PD) party were quick to rule out any deal with Berlusconi.

"As far as I go, absolutely not," Stefano Fassina, a PD official said of a possible Bersani-Berlusconi alliance.

A big surprise in the election was the strong showing by comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalized on a wave of voter disgust with the ruling political class. Grillo's bloc of seats in Parliament could prove crucial in making any coalition government viable.

But Grillo, swarmed by reporters outside his villa in Genoa, said his forces would seek to thwart any Bersani-Berlusconi deal. Raising the specter of early elections, he predicted any such coalition will "last seven, eight months. The economy won't let them escape."

Investors around the world appeared skeptical over the prospects of a deal.

"Clearly markets are taking fright from the messy and chaotic Italian election result," said Louise Cooper, financial analyst at CooperCity.

In Europe, Germany's DAX was down 1.9 percent at 7,630 while the CAC-40 in France fell 2.1 percent to 3,646. The FTSE 100 index of leading British shares was 1.3 percent lower at 6,276.

Italy is hugely important for the future of the euro, and its apparent stability over the past six months has been one of the reasons that concerns over the currency have eased. Of the 17 European Union countries that use the euro, Italy has the second-highest debt burden as a proportion of its gross domestic product, at 127 percent. Only Greece's is higher. Italy has to spend around €80 billion a year just to service its debt.

The worry across in financial markets is that Italy's appetite for reform may wane and its debt situation may deteriorate. Though Italy's annual borrowing — its budget deficit — is relatively small compared with other euro countries at 3 percent of its annual gross domestic product, its overall debt stands at a colossal €2 trillion.

The Monti government enacted wide-ranging reforms to the budget and the economy. Though its borrowing rates have fallen in financial markets, the cost to Italians has been high, with the country mired in recession and unemployment on the rise.

Monti was a big loser in the election and Berlusconi ruled out an alliance with his predecessor, whom he blamed for driving Italy deeper into recession.

On Tuesday, Monti huddled with his ministers for the economy and European affairs, as well as Italy's central bank governor over the market developments, his office said.

Last July, concerns over the country's ability to pay down its debt — despite the Monti reforms — and the stability of the wider eurozone sent the interest rate on its 10-year bonds back up to a near-unsustainable 6.36 percent. This prompted European Central Bank chief Mario Draghi to offer to buy up unlimited quantities of short-term debt in countries struggling with high borrowing costs.

In Spain, another country struggling with austerity, ministers expressed concern over the Italian election results but were confident they won't upset plans to lift Europe out of the crisis.

Foreign Minister Jose Manuel Garcia-Margallo said the result was "a jump to nowhere with positive consequences for nobody."

The EU's economic and monetary affairs commissioner, Olli Rehn, told reporters in Copenhagen Tuesday that it was important "Italy pursues reform for the sake of sustainable growth and job creation."

The euro was hit hard late Monday on the initial fallout of the election results, nearly dropping below $1.30 for the first time since early 2013. However, it recovered Tuesday before some positive U.S. economic data gave the dollar a fillip. It was trading 0.1 percent lower at $1.3062.

U.S. stocks rebounded too, a day after the main U.S. indexes had their worst session since last November amid the positive consumer confidence and housing data as well as an indication from Federal Reserve chairman Ben Bernanke that the central bank was not going to abandon its super-easy monetary policy just yet — the Dow Jones industrial average was 0.5 percent higher at 13,854 while the broader S&P 500 index rose 0.2 percent to 1,490.

Earlier in Asia, Japan's Nikkei slid 2.3 percent to 11,398.81 as the yen appreciated to the potential detriment of the country's exporters. The dollar was 0.4 percent lower at $92.23 yen. Hong Kong's Hang Seng dropped 1.3 percent to 22,519.69 while South Korea's Kospi fell 0.5 percent to 2,000.01.