Italy Politicians Mull Coalition Options After Election Gridlock

    By Christopher Emsden

    ROME--Italy's veteran politicians reacted with caution to the powerful electoral performance of the insurgent Five-Star Movement, which won almost a fifth of parliamentary seats and is poised to block the formation of almost any government in the euro-zone's third-largest economy.

    "We'll need some time to reflect on this," said Silvio Berlusconi, whose center-right coalition also posted a surprisingly strong second place.

    He signaled that he might consider a grand coalition with Pier Luigi Bersani's center-left coalition, but excluded opening any alliance to centrists led by Mario Monti, the technocrat who replaced Mr. Berlusconi as prime minister in late 2011.

    Italian markets were roiled by the inconclusive national vote that ended Monday. Yields on 10-year government bonds traded up at 4.70%, more than half a percentage point than their low the day before.

    Over time, each half a point amounts to an extra EUR10 billion in annual financing costs for Rome.

    Mr. Bersani is due to speak at 1600 GMT in Rome but has so far not indicated what he intends to do. Some officials in his Democratic Party want to hold a new vote right away but others insist on a more cautionary tale given the country's delicate economic situation.

    New elections soon are likely as "gridlock in parliament means gridlock in the economy" which is already st ruggling with rising unemployment and bad loans, said Alberto Gallo, an analyst at Royal Bank of Scotland.

    That won't happen, because Mr. Grillo stands to win a deluge of votes in a new election, crushing the influence of the country's political elite, said Wolfgang Piccoli, an economist at the Eurasia Group.

    A snap vote "would demonstrate the weakness and incompetence of the mainstream political parties," he said. Instead, Mr. Bersani may have to run a minority government, winning support for a limited set of reforms from the other parties. In such an arrangement, fiscal policy would likely remain within the European Union guidelines, with "routine maintenance" replacing any more ambitious agenda, Mr. Piccoli said.

    Mr. Grillo has given no indication of his intentions. His party won 108 of the 630 seats in the lower house and 54 seats in the 315-member Senate.

    On Tuesday, he gave only a thumbs-up to television crews outside his house near Genoa.

    Members of his party insisted they had earned a king-maker's role in the legislature and also underscored that a law governing conflicts of interest is a fundamental part of their program.

    That was widely seen as a message sent to Mr. Bersani not to ally with Mr. Berlusconi, the tycoon often accused of encouraging laws to help his media empire and other personal interests. Other points of potential convergence with the left are introducing a basic "citizens' income" and a wealth tax.

    Meanwhile, Nichi Vendola, head of a small left-wing party allied with Mr. Bersani, made a point of declaring Mr. Grillo "the real winner of the elections," indicating an aperture to forming a majority with the Five-Star Movement rather than with Mr. Monti, as was widely expected before the vote.

    Write to Christopher Emsden at #CHCEmsden