- The political situation in Italy is still uncertain, with some indication, but no formal appointment of the Prime Minister. We may witness a somewhat unusual state of affairs over the next few days, a sort of “technical government” of no parliamentary extraction, subject to a political contract. This could prove challenging in the medium-term, undermining the independence of the Prime Minister and the Government. The appointment of the Minister of Economy and Foreign Affairs will be key to reassure European partners in respect of EU rules, the euro and international cooperation. On these topics the positions of the two main parties are still unclear.
- The contract between Movimento 5 Stelle (M5S) and Lega Nord (League), as it has been formulated, presents a number of challenges. Its implementation risks not being consistent with Stability Pact and the Constitutional principle of a balanced budget. The programme as it stands, does not respect the characteristics necessary for being considered a proper budget. It is likely to be modified, should the Government be formed.
- On Euro fixed income, despite a sharp widening of the spread, uncertainties around the implementation of the measures announced by the coalition and their financing would suggest playing the market with tactical positions and a limited amount of risk. Investors need to get more accurate information on those aspects before implementing a strategic position in Italian government bonds.
- Contagion effect on other peripheral markets should be contained if the issue stays focussed on the degree of the Italian fiscal expansion. Should the discussion ramp up to challenge European unity, the contagion could be much broader and detrimental to other peripheral spreads.
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