(Finance) – The umpteenth Italian political crisis has surprised the markets, in the sense that investors did not expect such a level of uncertainty before the end of the legislature, but it is certainly not an unprecedented fact. In the absence of the will to carry on the current ruling coalition until the originally scheduled deadline of May 2023, analysts agree in expecting a increase in the yields of Italian BTPs and a widening of spreads, as happened in the past. However, this moment is particular: Draghi will report to the chambers on Wednesday, while the European Central Bank (ECB) is expected to announce in Thursday’s meeting the anti-fragmentation tool for the benefit of the most indebted countries.
“Although Italy is no stranger to political chaos, this uncertainty may be more important than normal for the markets, as it precedes the presentation by the ECB of detailed plans on how it will intervene in bond markets and the volatility of Italian bonds could be a complication“, points out Matteo Ramenghi, Chief Investment Officer of UBS WM in Italy.” Furthermore, the markets are worry about the Recovery Fundwhich will be an important driver of the economy in the coming years, particularly in the wake of rising commodity prices, “adds the economist.
The perception from abroad is that Italian politicians are “playing a dangerous game while facing a potential energy crisis, high inflation, a high level of public debt, a slowdown in global demand, a cycle of rising interest rates and significant uncertainties about the ECB’s new “anti-fragmentation” tool “notes Credit Suisse. Analysts expect the ECB does not commit to addressing policy-driven spreadsas in the Italian case, and see a further widening of the BTP-Bund spreads “as it will probably exert further pressure on the ECB to ensure its credibility and effectiveness”.
The crisis of the Draghi government comes at a positive moment for the economy, however, with the GDP that could have grown beyond expectations and at a higher rate than the other euro area countries in the second quarter. Economic activity should in fact have accelerated, despite the increase in energy costs and the persistent difficulties in procuring intermediate inputs, according to Bank of Italy estimates. On the basis of the central projection of the models used by the Italian central bank, it was estimated today that GDP recorded an increase of about half a percentage point over the previous period.
The early election scenario is the one most feared by the markets and its prices are on the rise. Mario Draghi reported that he is determined to resign from the position of Italian prime minister if he does not have the support of all the parties that currently support him, therefore also of the 5 Star Movement which triggered the crisis. If Italy went to the elections in the fall, it would likely face a government very different from the one currently led by Draghi, as polls suggest a right-wing coalition could win a majority.
It is true, however, that exit from the Eurozone is no longer an eventuality that right-wing parties support, even if a right-wing government would likely be strongly Eurosceptic and anti-immigration and relations with the EU would suffer. “This is likely to raise investor concerns about Italy’s long-term prospects, both in terms of the Eurozone and in terms of the sustainability of its finances,” said Andy Mulliner, Head of Global Aggregate Strategies at Janus Henderson. This should not be an acute danger like the one we saw in the sovereign crisisbut this scenario will almost certainly see a larger risk premium for Italian debt, which will further aggravate the tightening of monetary conditions by the ECB.