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By Jason Stipp and Jeremy Glaser | 02-26-2013 09:00 AM

Conditions Ripe for More Market Turbulence

After a period of relative calm, the Italian elections and fight over the sequester underscore some of the structural problems facing the global economy; investors should be prepared for volatility, says Morningstar's Jeremy Glaser.

Jason Stipp: I am Jason Stipp for Morningstar. Monday's sell-off is one of the worst that the market has seen in quite a while. So are we in for another series of storms after a period of relative calm? Here to offer some insights is Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

Stipp: On Monday, the market seemed especially upset about the situation in Europe, though that's not the only thing potentially that the market is upset about, but let's start in Europe because that seemed to be in the headlines Monday. What's the situation there? Why did we see a sell-off potentially because of issues that are going on there?

Glaser: The big thing the market was focused on Monday were the Italian elections, and the fact that they had inconclusive results. Despite some early reports that maybe the Center-Left Party had managed to get a majority in both the lower and upper house in the Italian Parliament. When the actual votes start to get counted, it turns out that that was not the case. It looks like there's going to be a three-way tie in the Italian parliament and that will be extremely challenging for these groups to come together and form a coalition government, and it's likely that we are going to hit another election relatively soon.

Stipp: So events in Italy on the political front are definitely still unfolding, but let's talk about Italy with respect to the whole eurozone. How important is Italy and the troubles in Italy to the broader issues that we've been seeing across the region?

Glaser: Italy is really the red line in the eurozone crisis. You look at a country like Greece, which obviously is having substantial problems and even Spain, which is still working through some of its issues, they are relatively small economies both in the context of Europe and in the rest of the world.

But Italy is a much larger, much more important economy and if the kind of crisis that we've seen in Greece and Spain were to spread to Italy, it would be a major problem and would really put an incredible amount of pressure on the euro. There is already a lot of pressure kind of keeping the euro together, as is.

The issue is not that Italy has the kind of spending problems that we are seeing in Greece, where there is a huge primary budget deficit. Right now things are mostly under control. The concern is that will future Italian governments be able to make the reforms, make those pension reforms and work-rule reforms that will allow Italy to remain in that relatively good spending situation and keep their borrowing costs low, so with their already pretty large existing debt stock, they are not paying a huge premium on that and that debt service kind of gets away from them. I think the concern right now is that they are not going to be able to come up with a government that's going to be able to do that.

After Silvio Berlusconi stepped down and Mario Monti came in, Monti was just to be a technocratic leadership, kind of a consensus builder who kind of put Italy on that path. And the financial community was very happy with his performance. But it seems like Italians were less excited. His party received less than 10% of the vote when he ran in this election; they had expected to do much better. There just seems to be a very fluid political environment and people can't seem to really decide exactly what they want the future of the country to look like. I think that concerns the markets. It concerns people who are worried that they're not going to be able to make those reforms. I think that's the big issue in Italy right now and why you see the markets selling off and why people are worried that this doesn't potentially bode well for the rest of Europe.

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