Eurozone: ITExit risk remains low - Danske Bank

According to analysts from Danske Bank, the next political risk event in Europe is the Italian parliamentary elections on March 4. They see high uncertainty about new government composition and also a limited risk of the Italian election arising as a key market theme in contrast to last year’s French election. 

Key Quotes: 

“The next political risk event on the agenda in Europe is coming closer with the Italian parliamentary elections on 4 March 2018. However, so far market sentiment has remained fairly complacent, which we think is adequate as the election will be mainly a domestic risk event and given the low risk of Italy actually exiting the euro even if the euro-sceptic Five Star Movement, which is leading in the polls, comes to power.”

“Irrespective of the governing coalition formed after the election, we do not expect the new government to undertake the necessary structural reforms to kick-start the Italian economy, meaning that Italy will remain the ‘weakest link’ in the Eurozone. Most parties are also running on a platform to increase fiscal spending, heightening investor concerns about debt sustainability and potential clashes with the European Commission.”

“We assess the risk of a Eurosceptic government as very small and even in this case expect ITExit discussions not to be a first priority. Eurosceptic parties such as the Five Star Movement and Northern League have recently toned down their rhetoric on the topic and do not advocate an immediate euro exit referendum anymore in order to appeal to centrist voters.”

“The low ITExit risk is also apparent in current market pricing. Demand for Italian debt has been strong since the repricing in December and early January and Italy is still supported by the ECB’s QE programme and the significant carry. For the FX market, we also see only a limited risk of the Italian election arising as a key market theme in contrast to last year’s French election. EUR/USD in our view currently incorporates only a minimal political risk premium and as we do not see the Italian election as a big event risk for EUR spot rates, it adds to our view that any dips in EUR/USD will be shallow and short-lived.”

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