Market Pressure Mounts on Italian Assets

Anti-Establishment Government Looks Likely

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One Step Closer To The Edge

Italy has moved even closer to unprecedented territory this week and while an eleventh-hour failure cannot be totally counted out, it seems that a government between The Five Star Movement and League is likely to happen. What isn’t clear, however, is whether such a government would be capable of delivering its pledged measures, which would cost around roughly 500 billion EUR per year unless such measures are funded by credible offsetting saving initiatives. However, due to external and internal constraints, it is unlikely that a 5SM – L government will be able to approve its full economic programme.

Sergio Mattarella, President of the Republic, met with 5SM leader Luigi Di Maio and League leader L Matteo Salvini this week. During a press conference held after the meeting, the two political leaders announced that they had suggested to Mattarella a nominee for the presidency: law professor, Giuseppe Conte.

Mattarella has now given Conte a mandate to form a government. IT’s not a deal set in stone, and the government must pass a confidence vote in Parliament. However, the likelihood is high as the two parties have a majority, however slim.

ForexTV

Market Pressure Mounts on Italian Assets

With political uncertainty having plagued the country over the last month, market pressure mounts on Italian assets. In the wake of last week’s release of a particularly challenging economic programme, reports by the media have added further pressure regarding potential political composition, resulting in a 21% one-day increase in the 10y spread between German and Italian bonds.

The President is expected to be focusing on keeping ties between the rest of Europe and the US strong and healthy. During a speech made on the 12th May in memory of former President Luigi Einaudi, Mattarella noted that he will be paying close attention to the economic and political sustainability of any bills the government puts before his consideration.

Risks to The Government

While agreeing a coalition between 5SM and L might seem like the end of Italy’s political troubles the government is likely to face huge restraint due to both internal and external issues.

1 – A 5SM – L government would hold only a very slight majority of 6 seats in the Senate and 31 seats in the Lower House which might prove too fragile to act as a platform for any significant political and market pressures.

2 – Mattarella, who still holds the power to veto and government bills deemed unconstitutional, can reject and fiscal measures if he deems them a threat to the stability of public finances, as noted by Article 81 of the constitution.

3 – The fiscal measures pledged by 5SM and L could potentially add further fuel to the tensions between Italy and its partners. While the European Commission is expected to take a conservative approach, it is possible that 5SM – L rhetoric could escalate to the point where Italy ends up holding a referendum on EU/EA membership, whether unconstitutional or not. However, this is highly unlikely and only represents a disaster scenario.

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Potential For Government Crisis

However, what is a substantial risk, is the potential for a government crisis or the holding of snap elections. Given the high level of constraint on a 5SM – L government, and the difficulty such a government will have in passing legislature, it could quite quickly reach a point where the government finds itself breaking down and is forced to hold a snap elections. If such a move were to occur, current polling suggests that L and not 5SM, would be the winner and given the credibility damage to L of being involved in an anti-establishment government, the potential for snap elections being held is significant.

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