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Italy: Further market turbulence lies ahead – Danske Bank

Analysts at Danske Bank, point out that risks emerging from Italian politics recede after the weekend but only temporarily. They warn about a potential downgrade from Moody’s.

Key Quotes:

“Although the president’s move has created some short-term respite in the Italian turmoil, we see a strong possibility that populists will emerge from a new election even stronger, given the current momentum and mood. This means further market turbulence lies ahead, also because eurosceptic tones are likely to feature even more prominently in the next election campaign, especially from the League.”

“The market is still concerned about the political outlook and that a caretaker government or new snap election would not be a silver bullet for solving the political impasse in Italy, especially as both 5SM and the League could benefit from the current situation and the political discussion might increasingly centre on the question of leaving the euro.”

“We stay on the sidelines with respect to BTP exposure despite the healthy carry on the Italian curve and the imminent lower risk of a populist government.”

“Over the weekend, Moody’s put Italy on review for possible downgrade. This is very serious as Moody’s did this outside the normal rating calendar and it usually takes rating action outside the schedule only if it sees a material change in assumptions regarding the current rating and outlook. Furthermore, it is negative watch, which means it will take action within three to six months. However, Moody’s based its update on the programme of the ‘old’ government. However, if a possible new government continues down the same road, we believe it is likely Moody’s would go through with the downgrade.”

“We have seen some contagion from Italy to Spain and Portugal. In respect of Spain, we see pressure on Prime Minister Mariano Rajoy. However, the political situation is in no way comparable to that in Italy. There is no specific reason why Portugal is spreading out. If we see some weeks of stabilisation, both Spain and Portugal could offer interesting opportunities for bond investors.”


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