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Analysts at ABN AMRO are seeing heightened risk of early elections in Italy, given the recent polls and potential tensions.

Key Quotes

“We think the Lega leader would want to be confident that a right wing coalition would win before trying to engineer a government collapse and new elections. With the coalition polling at 50%, it is probably not sufficient for Mr Salvini to be confident in getting sufficient votes for it to form a coalition government with a clear majority.”

“Our current base case for this year – which assumes no early election – sees the 10y yield spread of Italian government bonds over their German counterparts rising to 300 bp. The Italian economy is in recession and the budget deficit is likely to significantly overshoot the government’s target. In addition to likely further disappointments in terms of the macro outlook (we see GDP of -0.3% this year versus the government’s projection of 1%), we think that the measures that the government has implemented will be more expensive than the budget assumes.”

“Overall therefore, we expect the budget deficit to be considerably higher than projected, at close to 3% GDP in 2019 and 2020. Given this, we remain of the view that the government debt ratio will trend up in the coming years. With fiscal outcomes likely to disappoint, markets may price in more credit risk, especially as this could re-ignite tensions with the European Commission.”