Investor concern over Cyprus is rapidly being replaced by fears for Italy, as political deadlock continues and the country's main leadership candidate reportedly said that only an "insane person" would want to govern Italy now.
Pier Luigi's Bersani, the leader of the center-left coalition, reportedly made the remark after the anti-establishment "Five Star Movement" party headed by comedian Beppe Grillo again refused to form a coalition government with Bersani, thwarting his latest attempts to form a governing alliance.
After the latest rejection from the anti-establishment movement, Bersani said "only an insane person would want to govern this country, which is in a mess and faces a difficult year ahead," Dow Jones reported.
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European shares turned negative in Wednesday's mid-morning trade. Italy's borrowing costs rose at an auction on Wednesday morning and the euro fell to a four-month low soon after the remarks.
Despite Bersani's attempts to reassure delegates of the Five-Star Movement in Rome that he would never seek to form a grand coalition with Silvio Berlusconi's center-right group, Grillo's party said it was "unanimous" in its refusal to support him.
Bersani and his Democratic Party (PD) have sought a way out a month of political deadlock after elections in February failed to produce enough votes for his party to have a majority of seats in the Senate, as well as in parliament. He needs the support of Grillo's party and on Wednesday asked the Five Star Movement "not to impede" his efforts to form a government, a call which was also rebuffed, Dow Jones reported.
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On Thursday, Bersani is due to report to Italian President Giorgio Napolitano, on whether he has the required support to form a Senate majority and thus a mandate to govern. With Grillo's refusal, this looks unlikely and Napolitano could appoint a technocratic leader until elections are held again later this year.
"Italy has become ungovernable," Nick Spiro, managing director of Spiro Sovereign Strategy, said on Wednesday. "There's no prospect of a stable government, never mind a reform-minded one. The "Grillo effect" is becoming more apparent with each passing day, with the leaders of Italy's two traditional parties struggling to retain their influence on the political scene. Bersani's hopes of forming a government appear doomed, with the most likely outcome being another caretaker-type government to see Italy through to elections later this year or early next," Spiro told CNBC.
"Post-election instability is starting to seep into Italy's bond market. The result of this morning's auction, although a mixed bag yield-wise, underscores the fragility of sentiment towards Italy," Spiro added on Wednesday.
Before Bersani's comments, JPMorgan released a research note stating that Italy was "about to step off square one," but said that it still expected elections later this year.
"Whatever Bersani presents to Napolitano this week, it is likely to take Italy off square one – the uncertainty, and apparent lack of action, which has prevailed over the past month. The PD [Bersani's party] will need to make clear which options it is able to pursue, and the President will then need to steer the political process in one direction or another", Alex White, an economist at JPMorgan, wrote in the research note on Wednesday, adding it was unlikely that Bersani would be given a mandate to govern without broader political support.
"We remain of the view that new elections this year (probably in September) are still the most likely outcome. The parties remain in campaign mode…If elections are held later this year, we would expect a short-term caretaker government to preside in the interim," White added.