Italy's parliamentarians re-elected Giorgio Napolitano to the role of president over the weekend, but while it was a step in the right direction, analysts said
The 87-year-old Napolitano, who had previously ruled out serving another term as president, accepted the role again after he emerged as the consensus choice among Italy's fractured political parties.
It took six rounds of voting by the 1007 parliamentarians and regional representatives to settle the election, after a number of candidates failed to find support in early rounds.
Italy's borrowing costs fell on Monday, yields on its on its ten-year benchmark bond fell 12 basis points to 4.1 percent.
Italy's president has a largely symbolic role and true power rests with the prime minister. However, the president's role has taken on more importance as Italy has been effectively leaderless since inconclusive elections in February failed to give any political leader a mandate to become the next prime minister.
The presidential election has not come without a cost to the largest group in the lower house of parliament, the center-left Democratic Party (PD) headed by Pier Luigi Bersani. Bersani, once seen as the most likely prime minister, resigned on Saturday after a rebellion within his own party resulted in both the candidates he backed during as President - Franco Marini and Romano Prodi – being defeated. The PD's president, Rosy Bindi, also resigned.
"Presidential elections have proved disastrous for Italy's center-left Democratic Party," Peter Ceretti, director or research at the Eurasia Group, said in a note over the weekend.
"Napolitano reluctantly agreed [to accept the presidency again]… he has demanded cooperation and "responsibility" from the main political parties in exchange for his willingness to remain in office, however, and it is rumored that an agreement on government formation may have been a pre-condition for his acceptance," Ceretti added.
But Ceretti said the risk of a snap election remained as Berlusconi's center-right could be emboldened by the rebellion in the center-left PD.
"Regardless of what sort of concessions Napolitano may have extracted, government formation will remain a difficult process… Berlusconi could still be tempted to go back on whatever agreement he may have struck with Napolitano and push for a snap poll in July…Moreover, despite the hung parliament risk associated with a summer election, Berlusconi may now feel that he stands a chance of pulling off a decisive win against a considerably weakened PD," Ceretti said.
Napolitano is expected to push for a broad coalition government again but the job will be harder with the PD in disarray. Bersani had worked closely with Napolitano over the past few months to try to solve the political impasse. Napolitano has also brought together a group of ten advisers or "wise men" to resolve the deadlock and get the country's economic reforms back on track.
(Read More: Can 10 'Wise Men' Really Save Italy?)
At this point, the most likely scenario is a "President's government", with broad support from the PD and Berlusconi's PDL (possibly together with the Northern League) and the Civic Choice, economists Luca Cazzulani and Loredana Federico at Unicredit said in a note on Sunday.
"Such a government is expected to deal with well-defined institutional and economic issues, along the lines of the findings of the two committees of wise men set up by Napolitano a few weeks ago," Cazzulani and Federico said.
"At the same time, however, visibility in the center-left has dramatically reduced, with the PD turmoil promising to have important ramifications, including the possibility of a party break-up. As a matter of fact, the PD is now lacking a clear leadership, different factions are emerging, while [their] junior coalition party has already gone its own way announcing that it won't support a President's government."
"Future developments on this front need to be monitored extremely closely," Cazzulani and Federico added.
A broad coalition government is an idea that was previously rejected by the center-left, which won the most seats at the election and refused to join forces with Berlusconi's center-right.
Beppe Grillo, the leader of the anti-establishment "Five Star Movement" criticized the re-election of Napolitano as a desperate attempt to retain power by a discredited establishment, Reuters reported.
-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt