Italy: Markets hardly bat an eye on elections - Rabobank

Analysts at Rabobank, suggest that the Italian elections, risky as they always are, are scheduled in less than two weeks but large parts of the markets hardly bat an eye and even though they don’t expect the elections to turn into a systemic crisis for the Eurozone, this complacency is risky.

Key Quotes

“The Italian elections are on March 4 and will likely yield a hung parliament. The centre-right has then the best chance to form the next government, but the less leverage Forza Italia will have over the (Northern) League, the lower the probability of success. If the centre-right fails, a Grand Coalition including the Democratic Party, Forza Italia and other centrist parties will get more likely. If that fails as well, President Mattarella will ultimately have to ask current PM Gentiloni to head a caretaker government and to navigate Italy towards fresh elections.”

“The balance of risks is skewed to the downside. Markets like the low-key management style of current PM Gentiloni. A status quo, in which a Grand Coalition is formed under his command, would be the most stable and predictable situation. Everything else would be considered worse, including the formation of a centre-right government.”

“This is because there are too many uncertainties regarding the (Northern) League’s policies. The market may be too complacent about this, focusing only on Five Star. If the League’s ‘fanatic’ ideas ultimately push Forza Italia towards the Democratic Party, the market will turn out to be right. If not, we may see a repricing of risk assets.”

“Italy will stay in the Eurozone, but proposals to alter the budget rules, for more (fiscal) sovereignty and to increase risk-sharing are likely to be put forward. Eurosceptic rhetoric could also increase. If the Italian government were to adopt a highly confrontational stance, which is certainly a possibility if a centre-right government emerges, Italian politics could weigh on Eurozone reform.”