Markets fall on fear of Italy post-election deadlock

Markets have fallen in anticipation of political deadlock in Italy following parliamentary elections there.

Exit polls suggest the centre-left has won a lower house majority, while early count data gave Silvio Berlusconi's centre-right the lead in the Senate.

Global bank shares, the euro, and Italy's bond and stock markets fell back on fear the results may unleash new financial stress in the eurozone.

Mr Berlusconi quit as Prime Minister in 2011 amid a major financial crisis.

At the time, markets had lost confidence in his ability to push through spending cuts and difficult labour market reforms deemed necessary to revive Italy's economy.

The Rome government was faced with spiralling borrowing costs in the bond markets, while the country's banks were forced to turn to the European Central Bank for emergency loans.

The elections follow the end of the caretaker premiership of technocratic Prime Minister Mario Monti, who took over from Mr Berlusconi and pushed through a plethora of unpopular economic reforms, that helped regain the markets' trust.

Deadlock concerns

The Milan bourse, which had been up 4% for the day in mid-afternoon trading, gave up its gains as the early Senate results came through, ending the day only 0.7% higher.

Italian bank stocks, which had surged more than 7% on hopes of a stable centre-left coalition government under Pier Luigi Bersani, also gave up most of their gains.

The negative tone continued into US trading hours, with the Dow Jones falling steadily from mid-morning, to finish the day 1.6% lower.

US banks were also badly hit by concern that a failure by the new Italian government to get to grips with the country's heavy debt burden could lead to renewed stress in the international banking system.

Morgan Stanley fell 6.6%, Citigroup 3.8%, Bank of America 3.6% and JP Morgan 2.5%.

On the bond markets, Italy's cost of borrowing ended Monday fractionally higher at 4.49% per year, from 4.33% at the end of Friday, as the perceived riskiness of lending to the government rose.

The implied yearly cost of borrowing had fallen to 4.17% at one point, before news of the Senate results arrived.

Meanwhile, on the currency markets, the euro - which had gained a cent against the dollar to $1.33 at one point - fell back again to $1.306, as hopes for greater political stability evaporated.