Italy: Entering a crucial period for its future - HSBC

In view of the Fabio Balboni, European Economist at HSBC, a series of key events in the next few weeks could shape Italy's political calendar this year and affect market sentiment.

Key Quotes

“On 11 January, the Constitutional Court will say whether the referendum on the Jobs Act proposed by Italy's main union is constitutional or not. If approved, it has to take place between 15 April and 15 June, unless an early election is called. Given the ruling party Partito Democratico is unlikely to want to bear the negative political consequences of another possible referendum loss, it could decide to bring forward elections. Legal experts quoted in the Italian press have suggested, however, that the Court might turn down the referendum request for the most important issue at stake, the reintroduction of Article 18, in place until two years ago, which used to make it impossible for firms to sack workers.”

“On 13 January, rating agency DBRS will conclude its review of Italy. DBRS is the only agency that still has Italy on an A-rating, and a possible downgrade could mean bigger haircuts might be imposed by the ECB on Italian sovereign bonds (and other assets) by the ECB. Although the direct implications for the banks are unlikely to be high, it could spur further negative market sentiment on Italian sovereign bonds.”

“On 24 January, the Constitutional Court will have a hearing on the electoral law for the lower house, the Italicum. This will kick-start the parliamentary debate on the issue, with the objective of realigning the electoral laws for the lower and upper house. Once this process is completed, elections can take place. We still expect the electoral law(s) to end up being a slightly softer version of the Italicum, favouring some form of coalition government in the future (making it harder for the populist euro-sceptic Five Star Movement to form a government on its own).”

“We still see early elections in Q2 2017 or possibly after the summer if the Jobs Act referendum is rejected. The new caretaker government also approved at the end of 2016 a bank rescue fund of up to EUR20bn (1.2% of GDP) to be used first for Monte dei Paschi di Siena. Such a fund does not provide a comprehensive solution to Italy's banking sector challenges yet, which are also likely to remain a key theme in 2017.”