Marktkommentar

Ann-Katrin Petersen (Allianz GI): Mamma Mia! No Italian populist government for now

What happened?

• In a rare move, President of the Republic Sergio Mattarella vetoed to appoint Paolo Savona as economy minister on concerns over his eurosceptic views. 
• Subsequently, Giuseppe Conte, the prospective PM of the 5*/League coalition, handed back the mandate to form a government to Mattarella.
• To complicate things further, 5* leader Luigi Di Maio requested yesterday that Matarella should be impeached “for betraying the state”. (Otherwise, Matarella's presidential term would end after 7 years in 2022).
• On Friday, i.e. already ahead of recent events, Moody's placed Italy's Baa2 rating on review for downgrade.
• Most likely, President Mattarella will grant Carlo Cottarelli, former head of the Fiscal Affairs Department at the IMF – and nicknamed “Mr Scissors” for earlier public spending cuts – a mandate to form an interim‎ technocrat government.
• On a positive note, the populist 5*/League government that had spooked investors by its confrontational stance regarding fiscal policy, reforms and its questionable commitment to the EU and Eurozone, is not to be formed (for now). This explains why Italian bonds have temporarily rebound in early trading on Monday.
• Moreover, unless Italian government bonds were downgraded to junk status by all rating agencies (not our base case!), their eligibility for the European Central Bank’s QE programme is not at stake.
• On a more negative note, political uncertainty will likely remain elevated. We doubt that new elections are a panacea for Italy’s future stability and expect peripheral government bonds to remain vulnerable in the near term, following the short-term relief rally.

 

What’s next?  

• However, a caretaker government is unlikely to last and early elections may have to be called. Why? The technocrat government must receive confidence of both houses. However, given the current Italian parliament’s composition and the latest indications made by the 5* and League leaders, there is a decent chance it would lose the confidence vote. This would pave the way for new elections, which could take place as early as September or October (within 70 days from the end of the term of the previous houses – which is unlikely to happen during the summer break). 

Bottom line: The political risk premium is here to stay

1. While an impeachment under Art. 90 of the Italian constitution, which allows parliament to demand a President step down based on an absolute majority vote “in the case of high treason or violation of the constitution”, faces major hurdles, Di Maio’s radical call breathes the spirit of continued confrontation and has triggered concerns about a constitutional crisis.
2. New elections are no panacea for Italy’s political stability. Latest opinion polls show continuing support for the 5* and League, currently at around 32% and 23%, respectively. At this stage, however, it is difficult to say whether the League would again form an electoral alliance with Silvio Berlusconi's Forza Italia, join forces with the 5*, or run as a single party. As before, the fragmentation of the electorate and the electoral law make it hard for any party – or any prospective political block – to form a stable government.