Italy towards early elections

0

Today, a deal seemed within reach when, unexpectedly, Lega demanded the formation of a new government led by Draghi excluding the Five Star. Such a proposal was unacceptable to several political forces as well as to Draghi, given that he was seeking broad support. Finally, the government won a vote of confidence with many abstentions, and we expect the resignations to be confirmed tomorrow.

Next steps involve President Mattarella meeting with Senate and lower house spokespersons and making a formal statement. It is highly likely that the president will announce a snap election at the end of September or, more likely, in October.

The uncertainty stemming from this political crisis matters more to markets than normal, as it comes just ahead of the ECB’s unveiling of detailed plans for how it will intervene in bond markets – and volatility in Italian bonds could be a complication. .

While elections would have been in a few months anyway and the government will remain in place until a new one is formed, markets may be less confident in Italy’s ability to fully use the Recovery Fund. stimulus this year – an important driver of the economy, especially in the wake of rising commodity prices.

The outcome of the early elections is very uncertain: the center-right coalition is slightly ahead in the polls, but the two coalitions suffer from internal divisions on strategic issues, in particular Italy’s position towards Ukraine. In particular, the divisions within the Five Star will weigh on the centre-left coalition.

Conversely, the risk of a serious slippage in fiscal policy is probably low given that any budget must be agreed with the EU. After all, even the Lega-M5S coalition government managed a modest 2% public deficit.
While memories of Europe’s political and sovereign crisis of a decade ago remain fresh, it should be noted that Euro-skepticism has faded everywhere, and no more so than in Italy. Indeed, no political force currently suggests that Italy would be better off outside the single currency. It should be recalled that in autumn 2014, 67% of citizens in the euro zone were in favor of the euro; that jumped 10pps to 77%. But in the case of Italy, the increase was even more remarkable: +18% to 72%.

Given the end of bond purchases by the ECB and expected rate hikes, Italian bond risk premia have more than doubled from their pandemic lows. At levels above 200 basis points against German 10-year Bunds for 10-year bonds, we believe investors are being fairly compensated for the risks arising from Italy’s heavy public debt burden and recurring bouts of political uncertainty.

At the same time, uncertainty about future government compositions may cause investors to react cautiously when elections approach and the demands of the most radical parties dominate media coverage. This usually results in temporary increases in bond risk premiums, with fluctuations of up to 100 basis points being quite common.

While the ECB is unlikely to jump into bond market interventions in response to wider spreads, we believe it would ultimately act to limit substantial distortions, at least as long as Italy remains stable. agreement with the EU on its budgetary policies.

Main Contributor – Matteo Ramenghi

The content is a product of the Chief Investment Office (CIO).

Read the original blog – Italy heads for snap elections, July 20, 2022.

Share.

About Author

Comments are closed.