Italian election renews fears of Europe crisis

(MoneyWatch) With federal spending cuts set to slam the U.S., another problem is beginning to heat up that could threaten the global economy: Europe's financial crisis.

Italian voters, grown tired of austerity measures that have slowed economic growth, split in a national election that deprived any single party of political authority. That has renewed fears of financial chaos in Europe's third-largest economy, as leaders wrestle for control.

"The inconclusive outcome of the Italian election looks set to prompt a renewed bout of market pressure which may eventually force Italy to request a support package from the eurozone," said analyst Ben May of Capital Economics in a research note.

The main concern is that already skittish investors will demand that Italy pay more interest in order to borrow the money it must have to pay its bills. If that cost gets too high, then Italy might have to seek some form of financial help from the European Central Bank. Yet because Italy is the world's 11th largest economy, a full bailout impossible.

Such an outcome may not come to pass. Although the interest rate on the Italian 10-year-bond has risen since the election, it now hovers around 5 percent, indicating that investors are not unduly alarmed at the prospect of political paralysis in Italy.

The question is how long such calm is likely to prevail.

"With political chaos likely to be the prevailing wind in the next few months, our pre-election view that Italy could be in play in again with regards to the sovereign debt crisis is beginning to unfold," wrote Raj Badiani, an economist with IHS Global Insight, in a report. "As expected, the general election has thrown up a substantial no-confidence vote on the current austerity plan and the need to reform further."

Italy's election came about after the resignation of Prime Minister Mario Monti, who was appointed to the position in 2011 following the resignation of Silvio Berlusconi, a tycoon who owns most of Italy's major media outlets and is about to face trial for allegedly having sex with an underage dancer.

Although crowds cheered and chanted "clown!" when he resigned, Berlusconi wasn't as damaged at the polls as  might be expected. His People of Freedom Party and its allies got 29 percent of the vote, which put him in a virtual tie with Pier Luigi Barsani of the Democratic Party and its allied parties. 

Coming in third with 25 percent of the vote -- more than any other single party -- was the 5 Star Movement Party, which is headed by Beppe Grillo. Before entering politics a few years ago Grillo was one of Italy's most famous comedians. He has so far refused to form a coalition with either of the other two, and this is unlikely to change as his party is built around his low-opinion of the professional politicians. When Bersani tried to get Grillo to agree to an alliance Grillo called him a "dead man talking" who should resign as leader of his party and stop making "indecent proposals" to the Five Star Movement.

If no party can get enough seats in both the upper and lower houses of Italy's parliament, another election will have to be held.

"The failure to find a working political coalition or even reforming a technocratic-based government as a last chance saloon option will result in mounting financial pressures on Italy," Badiani said.