Markets slammed by inconclusive Italian elections

Tuesday 26 February 2013 18.33
Europe's markets down after inconclusive Italian elections
Europe's markets down after inconclusive Italian elections

Political uncertainty in Italy hit world markets hard today with investors fearful that Europe's debt crisis may be about to rear its head again.

The election has proven so close that final official results are not expected until later today - at the earliest.

But already, the prospect of a political impasse has raised the possibility of further elections down the line.

Though the centre-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament, the Senate looks split with no party in control. 

The surprise factor was the astonishing vote haul of comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalised on a wave of voter disgust with the ruling political class.

Europe's main markets ended the day down across the board. Italy's FTSE MIB index was the worst-performing index, dropping some 4.9%. Shares in London were down 1.3%, while Frankfurt dropped 2.3% and Paris slumped 2.7%.

Italy is hugely important for the future of the euro currency. Of the 17 European Union countries that use the euro, it has the second-highest debt burden as a proportion of its annual gross domestic product at 127%. Only Greece's is higher.

Over the past year or so, the technocratic government led by Mario Monti, enacted wide-ranging reforms to the budget and the economy.

The cost though has been high, with Italy stuck in an 18-month recession and unemployment on the up. Monti was a big loser in the election.

The worry across Europe, and financial markets as a whole, is that the appetite for reform may wane and Italy's parlous debt situation may deteriorate.

Though its annual borrowing - its budget deficit - is pretty small compared with other euro countries at 3% of its gross domestic product, Italy has to splash out around 25% of its revenues every year just to service its debt mountain, which stands at around €2 trillion.