Italy: Its politics all the way – BBH

Research Team at BBH, suggests that looking at Italian markets, one would hardly know the extent of the political and economic challenges. 

Key Quotes

“Italian bank shares are up 2.7% on top of yesterday's nearly 9% advance.  Local papers claiming the government is considering drawing on an ESM facility has been denied.  Meanwhile, there are other reports suggesting the government could buy as much as two bln euros of subordinated debt owned by retail investors in Monte Paschi, and then swap those bonds for equity.”

“On the political front, the idea of a February election seems like a stretch.  Here is the problem in a nutshell.  The old electoral law was ruled unconstitutional.  The new law that applies only to the lower chamber is under judicial review, and a hearing is not planned until next month.  With the broad defeat of the referendum, there is a new electoral law for the upper chamber.  It is possible that Renzi does not just stay on for the passage of the 2017 budget, but until the electoral reform can be implemented to prepare for elections.”

“There is the usual fear-mongering.  The defeat of the referendum, some argue, means that the Five Star Movement is likely to head up the next government and quickly seek a referendum on EMU membership.  However, there is still good reason to suspect while this is possible, there are more likely scenarios.  Consider that 40% voted in favor of the referendum.  That was not enough to win the referendum, but it is enough to win a general election in Italy given the fragmentation of the electorate.”

“The referendum got all of the government's critics, some within the PD itself, on the same side of the issue.  An election is different.  Moreover, the electoral reform that the court is reviewing gives the largest vote-getting party bonus seats.  This seems to be the only way the 5-Star Movement could secure a majority, as it is weak in finding coalition partners.  This component may be struck down and instead, proportional representation re-introduced.”