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The Eurozone Is Not About to Unravel: Zachary Karabell

Daily Ticker

What a difference a day makes.

On Monday stocks around the globe took a dive following national elections in Italy which ended with no clear winner or pathway to a new coalition government.

By Tuesday global stock markets had recovered, helped in part by Fed Chairman Bernanke’s testimony before Congress which reinforced the Fed’s continued commitment to low rates and asset purchases.

The rebound continues but will it last especially if Italy’s political parties fail to form a new government or the anti-austerity vote there spreads to other European countries?

Related: Why Italy's Election Has Caused Global Markets to Crater

Here’s the political situation now in Italy, the Eurozone’s third largest economy:

  • The party of the current Prime Minister Mario Monti, hailed as a no-nonsense bureaucratic reformer, came in fourth in national elections held last weekend.
  • The left-leaning Democratic Party, led by Pier Luigi Bersani, won a narrow majority in the lower house but no single party won a majority in the Senate.
  • The center right alliance of former Prime Minister Silvio Berlusconi, who’s been convicted of tax fraud, and the anti-austerity 5-Star Movement led by former comedian Beppe Grillo, convicted of vehicular manslaughter in 1980, got the most votes in the Senate.

Eventually a new government will be formed or a new election will be held but neither is expected for weeks.

“There’s no clarity about what Italy will do,” says Zachary Karabell, president of River Twice Research. “ It’s a hung parliament at least in the senate and therefore there’s no clear outcome…..All that happens in Italy now is nothing.”

Karabell says markets may not like the uncertainty but they’re not behaving as if the worst will happen.

“Nothing about the Italian elections means that Europe is about to fall off the rails…The Eurozone is not about to re-unravel,” he says.

But he says the broader European crisis will likely continue for years and other countries will reconsider austerity-only measures, “even Germany.”

In the meantime, Italy held a relatively successful bond auction Wednesday. It sold 4 billion euros worth of new 10-year bonds and 2.5 billion euros worth of 5-year debt. Everything sold and the yield of 4.83% for the 10-year bond and 3.59% for five-year debt, though higher than the most recent auction, but nowhere near the yields reached in the thick of the financial crisis.

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