Ever since Italian elections yielded inconclusive results a few weeks ago, everyone has been wondering what happens next and how markets will digest the process.
centre-left candidate for prime minister Pier Luigi Bersani was expected to come out on top. While he managed to do that, centre-right rival Silvio Berlusconi and anti-establishment candidate Beppe Grillo took a bigger share of the vote than anyone expected. Now, Bersani has to form a coalition with one or the other in order to form a government, and both routes could be problematic. (For more on that, click here.)
That means Italy could be headed straight back to elections, introducing further uncertainties that could result in unfriendly scenarios for markets.
Luca Jellinek, head of European Rates Strategy at French investment bank Crédit Agricole, suggests that the worst case scenario going forward is also most likely.
The flow chart below, via eFXnews, looks at the odds of six different political scenarios unfolding and the outcome of each for the Italian bond market.
The most likely scenario, of which there is a 25 per cent chance, according to Jellinek, is that Italians go straight back to voting, and the second election produces another inconclusive result.
Italian 10-year bond spreads widen to a painful 5 per cent.
Photo: Crédit Agricole
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