The parliamentary poll ended in stalemate, with Pier Luigi Bersani’s centre-left Common Good coalition winning a majority in the lower house of Italy’s Parliament, the Chamber of Deputies, but failing to secure a majority in the upper house, the Senate.

Political groupings that had campaigned on a Eurosceptic, anti-austerity platform made a strong showing, including the protest group Five Star Movement, led by comedian Beppo Grillo, which won around 25% of the vote.

The success of these parties reflects the electorate’s ‘disenchantment’ with the structural reform programme instigated by Italy’s most recent prime minister, the technocrat Mario Monti. This raises ‘the risk of reversing some of the progress made on fiscal consolidation and structural reforms’, Moody’s said in a note published this morning.

Formal negotiations on a new government will not begin until the new Italian Parliament meets in two weeks’ time. Moody’s noted that, while there were several possible alliances that could be formed to establish a government, they all involved a ‘significant risk’ of political gridlock and new elections.

Italy has succeeded in reducing its deficit in recent years – down from 5.4% of gross domestic product in 2009 to 3% in 2012 – but structural challenges continue to hinder its recovery from recession. In particular, Moody’s highlighted its low productivity, labour market rigidity and high levels of taxation.

Monti’s government had made a ‘promising’ start to addressing these challenges, but the impact of the reform programme could be ‘profound’, the agency said. ’A combination of high debt levels and low economic growth leaves the sovereign vulnerable to a reversal of market sentiment, which experience has shown can change quickly,’ Moody’s explained.

‘Given the government’s debt stock of just under 130% of GDP and substantial debt-servicing costs (interest payments take just over 11% of the government’s revenues), Italy remains vulnerable to elevated costs of funding brought on by market volatility.’

Difficulties in implementing reforms could lead Moody’s to consider downgrading Italy’s current credit rating from Baa2. The agency already has a negative outlook on that assessment in light of the continuing ‘substantial’ risks to the structural reforms and fiscal consolidation.

With Italy’s status as the third largest eurozone economy, the election results and its resulting loss of investor confidence could also increase the borrowing costs of other weaker eurozone countries, therefore potentially ‘reigniting’ the eurozone financial crisis, Moody’s noted.

Ratings agency Standard & Poor’s said that while the election result meant there were ‘numerous’ uncertainties over the policy direction Italy’s new government would take when formed, it did not expect the country’s fiscal consolidation to deviate from its current path.

‘We currently believe that economic growth, more than fiscal performance, constrains Italy's sovereign creditworthiness,’ S&P explained. ‘We believe that the risk remains that the incoming government might not be seen as having a  sufficiently strong mandate to further implement important structural reforms  to improve Italy's economic growth prospects, with the economy remaining weak  for a protracted period.’

S&P’s current rating for Italy is BBB+ with a negative outlook.