Italy gridlock deepens as Europe watches nervously

Italy's political gridlock deepened on Wednesday with bickering between the main leftist party and a new anti-establishment party putting off the prospect of a new government any time soon, following shock elections that have spooked Europe. Comedian turned populist firebrand Beppe Grillo said his Five Star Movement (M5S) would not endorse the Democratic Party (PD), which won the most votes in the elections on Sunday and Monday but not enough to form a majority in parliament. "The M5S is not going to give a vote of confidence to the Democratic Party or to anyone else," Grillo, who has channelled the frustrations of austerity-weary Italians, wrote on his blog. The comment appeared to be a rejection of overtures from the PD, which on Tuesday held out the possibility of working with M5S on key reforms like slashing government costs and helping Italy's poorest get through a grinding recession. Grillo said the PD had made a series of "indecent proposals", prompting PD leader Pier Luigi Bersani to hit back with a statement saying: "If Grillo has something to say to me, including the insults, I want to hear it in parliament." Grillo has railed against traditional politicians and has called for a referendum on the euro. His party won 163 seats in the lower and upper houses. After market panic on Tuesday, investors were more measured on Wednesday, especially after a better-than-expected bond sale even though Italy's borrowing costs spiked. European capitals remained nervous however amid fears Italy could turn back the clock on reforms and austerity following an election that had been seen as crucial for the future of the eurozone. Italian President Giorgio Napolitano on Wednesday cancelled planned talks with the man bidding to unseat German Chancellor Angela Merkel after he called two Italian political players "clowns." Commenting on the inconclusive vote in Italy, Steinbrueck said late Tuesday he was "downright appalled that two clowns won" -- a reference to the big votes won by showman Grillo and scandal-tainted former premier Silvio Berlusconi. Government officials such as Foreign Minister Guido Westerwelle have called on Italy to continue on the path of reform pursued by outgoing Prime Minister Mario Monti that led to improved confidence in the financial markets. "The outcome of the elections was even more confusing than we had anticipated," the Mediobanca investment bank said as Moody's warned it might downgrade Italy's debt rating, saying the vote result "increases the risk of political paralysis and prolongs political uncertainty". The rating agency added: "This week’s elections have implications well beyond Italy itself and are, indirectly, credit-negative for other pressured euro area sovereigns." Monti was due to meet with European Commission president Jose Manuel Barroso in Brussels later on Wednesday also to discuss Italy's impasse. Backroom negotiations are already underway and they could last for weeks, with some analysts warning that if no deal is struck in parliament Italy may be forced to hold new elections. The PD-led coalition took the lower house of parliament but no party won a majority in the upper house and support in both chambers is needed in order for a government to be formed. Under the constitution, parliament has to meet within 20 days of an election, after which formal negotiations begin with Italian President Giorgio Napolitano on setting up a new government. The possibility of a minority centre-left government reliant on votes from other parties in the Senate on a case-by-case basis has been judged as possible but "highly unstable" by analysts. Leading Italian bank Intesa Sanpaolo warned the suspense could last for weeks. "Uncertainty may characterise the coming weeks," it said. Also Wednesday, Italy's ISTAT statistics agency said that business confidence had dropped from 80 points in January to 77.4 points this month. Italy is enduring its longest recession in 20 years and unemployment rates are at record highs. The government's forecasts of a gradual recovery starting in the second half of the year have been judged "too optimistic" by ISTAT. A coalition led by irrepressible tycoon Berlusconi confounded all poll predictions by coming in an extremely close second in the vote for the lower house, winning 29.18 percent to Bersani's 29.54 percent. The billionaire had promised to refund an unpopular property tax -- if necessary out of his own pocket -- and has blamed a "hegemonic" Germany for many of Italy's current economic woes. Monti was the big election loser, taking just 10.56 percent in the lower house, the Chamber of Deputies. His technocratic government, which replaced Berlusconi after he was ousted at the height of the financial crisis in 2011, won praise from other European leaders, but his austerity drive was unpopular at home. Bersani admitted he had been "overtaken" by the protest vote for M5S, which became the biggest single party in parliament, but warned that the huge anti-austerity protest vote should be heeded beyond Italy's borders. "The bell tolls also for Europe," he said on Tuesday in his first speech following the vote. Eoin Ryan, Italy analyst at IHS Global Insight research group, said: "The prevailing political situation is one of greater political instability in the short and medium terms". "Whatever government configuration takes shape, it will have to prioritise and find political agreement on electoral reforms, paving the way to fresh elections," he said.