Italy's Matteo Renzi to begin coalition talks

Lobby will 'eat Renzi for lunch': Pro

Italy is expected to face days of political horse trading for key posts as Matteo Renzi begins talks to form a coalition government.

Democratic Party (PD) Secretary Renzi, who is set to become Italy's youngest prime minister, is expected to take control of the country via the back door after engineering a backlash against former premier Enrico Letta. Letta tendered his resignation last week.

President Giorgio Napolitano met with Renzi on Monday for 90 minutes and gave him a mandate to form a government, according to Reuters. Renzi accepted the task and now has to seal a coalition deal before a formal vote of confidence in parliament later this week.

"I have accepted with responsibility and a sense of the importance of the challenge before me," he told reporters on Monday, according to Dow Jones. "I have assured (the president) that I will dedicate all my energies during this difficult time."

Renzi added that he would present a program for the reformation of the country's electoral system before the end of February. This would be followed by changes to the labor, tax and public administration laws by May, he said.

Marco Elser, a partner at Rome-based investment bank Advicorp told CNBC that Renzi's task ahead is akin to "walking into the lion's den."

"His strength is popular support and that popular support is going to go away unless he forms a government very, very quickly," he said. "He's going into a very powerful lobby of very professional politicians."

(Read More: Renzi set to become Italy's youngest prime minister)

Renzi will not only have trouble forming an inner circle but will also have difficulties trading with other political parties to forge a grand coalition, he said. The PD is the largest party in parliament but does not have the numbers to form a government on its own. It would need the support of a coalition partner, effectively putting other party politicians in the position of kingmaker.

Opposition party Forza Italia, still led by 77-year-old Silvio Berlusconi, could also unsettle the apple cart. The former PM has been ejected from his seat in the Senate because of his recent conviction for tax fraud but told journalists over the weekend saying the party would be a "responsible opposition".

VINCENZO PINTO | AP | Getty Images

Meanwhile, Angelino Alfano, head of Italy's New Center Right party which is a vital coalition partner for the PD, said on Saturday that he was ready to work on forming a new government but added that it may take a few days to hammer out an agreement on policy.

"We have very clear and concrete ideas on what the policy platform must be. If the ambition of the new government is great, then we cannot do things in a rush," Alfano said, according to Reuters.

Italian media reports said over the weekend that Andrea Guerra, the CEO of luxury sportswear maker Luxottica, had already pulled out of the race to become the new minister of economic development. Italian writer Alessandro Baricco has also rejected rumors that he will take a top job at the Ministry of Culture, according to reports.

Renzi needs to focus on international affairs: Pro

Fabio Fois and Giuseppe Maraffino, two analysts at Barclays, believe Renzi will form a new government in the next few days, ahead of parliament's vote of confidence, but said that implementation risks to his pro-growth reform agenda remain substantial.

"Small parties belonging to the grand coalition government may continue to hold veto power on structural reforms as they did under the previous government led by Mr Letta," they said in a research note on Monday.

(Read more: 'Demolition Man' Renzi's next fight: Berlusconi)

"Renzi's ability to take ownership of the reform agenda will be critical, as will his ability to secure strong support from members of the grand-coalition."

Markets remain upbeat

Italian financial markets have remained relatively sanguine despite the political upheaval in the country. The FTSE MIB Index climbed 3.78 percent last week amid the cut and thrust of the Democratic Party's inner tussle for power. Yields on sovereign bonds pushed lower last week with a successful bond auction and are set to fall further on Monday after Moody's upgraded Italy's credit rating outlook late Friday.

We want fresh elections: Forza Italia-PdL

"In general, the ascension of Renzi is seen by the market as a moderately positive event, as it could increase the likelihood of an acceleration of the reform process in Italy," Fois and Maraffino said.

(Read More: Berlusconi stands alone after party split)

"We do not expect a reversal of the current positive momentum for the Italian debt market, and any progress on the reform agenda is likely to strengthen the market sentiment."

Italy received yet more good news on Friday morning with gross domestic product for the country posting a moderate quarterly gain of 0.1 percent, the first time Italy has posted growth in almost three years. However, the southern European country - the third-largest economy in the 18-country euro zone after Germany and France - has been struggling to get its finances in order.

The country's debt as a proportion of its gross domestic product was 127 percent in 2012, according to European statistics database Eurostat. The only other euro zone country with a higher debt level is Greece at 159 percent. The country's unemployment rate remains stubbornly high at 12.7 percent.

By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81