Italy appeared to be taking a step closer to forming a coalition government on Wednesday, with the country's president seeking to push coalition talks between the biggest political parties.
President Sergio Mattarella summoned Senate speaker Elisabetta Casellati earlier Wednesday to ask her to mediate between Italy's main political parties to see if they can reach an agreement on the formation of a new government after weeks of failed talks.
Casellati, a member of the center-right Forza Italia party who was elected as speaker of the Senate recently with the approval of Italy's main parties, has been tasked with seeing if there can be a coalition between the 5 Star Movement (M5S) and an alliance of center-right parties. She is due to report back to Mattarella on Friday, ANSA news agency reported Wednesday.
A general election on March 4 resulted in a hung parliament in which no one party or coalition of parties won enough of the vote to govern alone. But the vote radically changed the face of Italian politics with populist, anti-establishment parties like the M5S and Lega, an anti-immigrant and euroskeptic party, performing well.
While M5S gained the largest share of the vote for a single party, the center-right coalition made up of former Prime Minister Silvio Berlusconi's Forza Italia, the right-wing Lega party under Matteo Salvini and two other smaller parties, also won a large share of the vote.
Talks aimed at forming a grand coalition between M5S and the center-right have failed so far, however, as M5S' leader Luigi Di Maio has point-blank ruled out any coalition that includes Berlusconi. Rather, Di Maio has urged Lega to drop its ally, Forza Italia and Berlusconi, in order to make a deal possible, but Salvini has so far refused.
Francesco Filia, chief executive and chief investment officer of Fasanara Capital, told CNBC on Wednesday that it is a "clear possibility" that Casellati gets a government mandate to head up a unity government.
"She could be the figure around which the M5S and League go together into government. It seems to be impossible for M5S to support any other type of government," he told CNBC's "Squawk Box Europe."
"The reception of the market could be positive but how stable (the coalition) is is a totally different matter. It could prove to be quite unstable and quite short-lived," he said, adding that a coalition made up of M5S and Lega could create volatility in Italy's financial markets.
Federico Santi, an analyst at political consultancy Eurasia Group, said in a note Tuesday that two key obstacles stand in the way of a M5S-Lega coalition.
"First, is the issue of the leadership. M5S leader Luigi Di Maio insists on becoming prime minister, but Lega's Matteo Salvini refuses to accept a subordinate role. Second, and related, is the role Silvio Berlusconi's Forza Italia would play," he said.
Any coalition formation could be delayed by regional elections coming up in Italy later this month, but the vote could be a test of support for parties such as Forza Italia that were sidelined in the general election. Santi said Lega will be watching the elections closely.
"While regional elections could make it easier for Lega to sideline Forza Italia, Lega has so far been reluctant to break its coalition. Salvini needs Berlusconi for leverage vis-a-vis M5S. He wants to avoid a messy break up, which could affect Lega's local government power base and ability to absorb Forza Italia voters (Salvini's longer-term ambition)."
Santi said a possible way around the impasse would be for a M5S-Lega government led by a compromise prime minister agreeable to both parties, "affording Lega control of some key ministries and leaving Forza Italia to play a less visible role, with direct or indirect control of some minor cabinet posts."