Britain is waiting for a new Prime Minister. It is an unusual feeling. Normally, as soon as the results are known the day after the polling, the old Prime Minister packs his bags and the new one arrives, and by the end of the day the government changes. But this time, with no party having a majority, there is a stalemate. Gordon Brown has to remain in office until it becomes clear who can command a majority. Then he goes to the Queen and advises her as to whom she should summon to form her next government.

The Conservatives got the highest share of the vote?36%, and the largest number of seats?306, yet 20 short of an absolute majority. Labour got 29% of the vote share and 258 seats, and Liberal Democrats got 23% of the vote share and 57 seats. Smaller parties have 29 seats. Negotiations have opened between the Conservatives and the Liberal Democrats, who together can command a majority, which Labour and Liberal Democrats alone cannot. There is little common ground between the Conservatives and the Liberal Democrats. So negotiations have continued and it is unlikely that a decision will be firm by Monday morning when the markets open.

The markets took a benign view of the UK debt situation early on Friday morning when they opened at 1 am, but the Sterling fell by two cents against the dollar on Friday. It also fell against the euro, which is strange, given the uncertainties surrounding the euro zone. After the convulsions on the Wall Street on Thursday, markets have a right to be nervous.

The EU finance ministers met yesterday to seal the deal, which has been made. While the large loan has been agreed, there are still major problems that remain. For one thing, the German government faces citizen anger about its decision to bail out Greece. There is a state election on Monday and the coalition partner Free Democrats may be punished for what they have signed up for. There is also going to be an appeal to the German Constitutional Court about the legality of the aid. Therefore, the package could come unravelled.

The Greek parliament has approved the cuts. But, it is doubtful if Greece can deliver the debt reduction programme. It may try to tackle the deficit, but all the time the debt will go on rising. Greece is technically a bankrupt country. If it had not been a member of EU, that is, had it been an Asian country, the International Monetary Fund would have advised restructuring. Creditors cannot hope to get their money back. But the IMF has a European person at its helm thanks to the existing unfair rules and Dominique Strauss-Kahn has ambitions to become the French President. So, he was unlikely to make himself unpopular by being hard on Greece.

All this would not matter but Greece has contagion effects. Not only Portugal, Spain and Ireland may suffer from the backlash but the UK itself could feel the cold wind. UK debt has a longer maturity and it has never failed to pay its debt. But with jittery markets, if there is no decision on Monday, which seems likely, there has to be some certainty by Tuesday when there is ?2 billion tranche of debt to be financed. There will not be any panic but the market may demand higher yields. Then the clock would start ticking faster.

The delay is because there is a strong tradition of inner party democracy (so unlike India). The Liberal Democrats have already had one meeting with their newly elected MPs. But before they can agree, the coalition package needs to be voted by the MPs and the National

Executive of the party. The Conservatives have their own backbench meeting on Monday. David Cameron has not pleased everyone by falling short of absolute majority and now entering into a pact with Liberal Democrats. It is quite likely that both sides may find their members reject the pact.

If so, we are then in longer delay territory. Gordon Brown is desperate to hang on and will try and concoct some deal which may pass muster. He will not succeed in my view as he has lost all confidence of the nation but he will waste time. The final result will be that Conservatives will govern as a minority party with outside support from Liberal Democrats for about a year. New elections will be held soon and then this may settle the matters.

The outlook remains very uncertain. It may take days or a fortnight before we know where we are going. Sterling will have a long stay in rehab while the uncertainty lasts. Bond yields will rise before they fall back to sensible levels.

?The author is a prominent economist and Labour peer