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MUFG analysts note that the euro and Italian bonds breathed a sigh of relief yesterday on the back of developments in the Italian parliament.

Key Quotes

“Yesterday Giuseppe Conte resigned as prime minister of Italy, passing the baton over to President Sergio Mattarella to decide on next steps for the Italian government. The euro rose into the end of yesterday’s European trading session and traded briefly above the 1.1100 level against the US dollar.”

“It was widely anticipated that PM Conte would resign but what has become clearer since Salvini announced his withdrawal from the coalition nearly two weeks ago is that an alternative to general elections in the near term are likely. President Mattarella will this week hold talks with various political parties, beginning at 5pm London time on Wednesday. Talks with larger parties will likely only begin taking place tomorrow.”

“The question now is whether a new coalition can be formed, likely between the Five Star Movement and the Democratic Party, or whether fresh elections need to be held. Fresh elections could reignite fears of a standoff between Italy and Brussels over budget constraints, given the views expressed by League and other right-leaning parties over the past few months on fiscal policy. And even if a coalition is formed between the Democratic Party and FSM, this likely only postpones the inevitable of a less fiscally conservative hand at the helm of the Italian government.”