Italy: False hopes of a different outcome – Nordea Markets

Jan von Gerich, Research Analyst at Nordea Markets, explains that after the president effectively blocked the formation of a M5S/LN government, Italy is heading to another election in the autumn.

Key Quotes

“In a new twist to the difficult government formation in Italy, President Mattarella blocked the candidate for the finance minister, Paolo Savona, due to his euro-sceptic views. As the two parties trying to form a government, the anti-establishment Five Star Movement (M5S) and the anti-euro and anti-immigration Lega Nord (LN), insisted on Savona’s nomination, the government formation talks collapsed.”

“President Mattarella will now try to form a technocratic government that would guide Italy to new elections late this year or early next one. One task of such a government would be to change the electoral law to make forming majority governments easier. It currently looks unlikely that such a government would be backed by the parliament, which means elections already somewhat earlier in the autumn.”

“Considering that President Mattarella prevented a majority government from being formed, while M5S and LN are already doing their most to portray this as Italy being guided by ratings agencies and Germany, the support for M5S and LN could easily only increase in new elections. In fact, the LN is already polling more than five percentage points above their result in the March vote.”

“From a market perspective, the centre-right coalition would be a less scary prospect. In fact, Berlusconi has already defended Mattarella’s decision and he would no doubt try to act as a moderating force in a coalition with Salvini.”

“Given the stance towards the euro is the single topic financial markets are most sensitive to, the worries towards Italy are probably only starting to increase in the bigger picture.”

“As the recent events in Italy at least push the eventual reckoning forward and raise some hopes of an alternative outcome, there will be some relief in financial markets.”

“Market worries towards Italy are far from over, and at the latest will pick up again towards the autumn, as the new vote looms. Any short-term relief in Italians markets should thus be seen as an opportunity to build more defensive positions.”