Italy’s pick fails to reassure investors
Italy’s efforts to build a coalition government out of two largely irreconcilable parties advanced last week as President Sergio Mattarella confirmed Giuseppe Conte’s appointment as Prime Minister. This hands Conte, an academic with no political experience, the job of forming a government that satisfies both the anti-establishment Five Star Movement (M5S) and the right-wing La Lega.
President Mattarella is reported to have reminded Conte of the need to protect Italy’s financial stability and budget constraints as political warnings from the rest of the EU continue.
“Italy is playing with fire and is endangering the Eurozone … It cannot ignore its own financial facts,” said Eckhard Rehberg, a member of German Chancellor Angela Merkel’s party, according to the Handelsblatt newspaper. That follows blunt language from French Finance Minister Bruno Le Maire, who said on May 20 that “if the new government takes the risk of not respecting its commitments on debt and the deficit, but also the clean-up of the banks, the financial stability of the Eurozone will be threatened,” reported Agence France Presse.
Fully aware
Conte, who calls himself “the defence lawyer of the Italian people,” addressed such comments saying he was “fully aware of the challenges we face,” and “aware of the need to confirm Italy’s European and international standing,” Reuters reported.
If nothing else, market reactions to the two-month negotiating process since the general election have underlined what’s at stake for the Eurozone’s thirdlargest economy. The spread between Italian benchmark government 10-year notes widened last week as much as 190 basis points against German sovereign debt, the most since June 2017. Fiveyear credit default swaps, the price of insuring Italian debt, had increased to 150 basis points at the time of writing, a level also not seen in 11 months.
There has certainly been some impact on the euro as the EUR/USD moved below 1.18. Other factors in the euro’s decline have been US rates trading above 3 per cent and higher oil prices on the back of supply fears.
14-month average
Our investment case for Europe more widely remains unchanged. We expect European markets to recover on the back of attractive valuations, a very supportive domesticdriven recovery and weaker currency headwinds. Still, Italy’s political turmoil combined with softer Eurozone data have pushed back market expectations for further monetary policy normalisation.
Italy’s debt profile remains sustainable with rather long maturities, while GDP is forecast to rise and unemployment to fall. Italy is also helped by its primary surplus (tax income is higher than spending excluding interest on debt) and continued low interest rates along with the clean-up of the worst of the Italian banks.
In political terms, Italy’s north-south split in the general election vote means that the partnership between Le Lega and M5S looks unlikely to last. The average lifespan of an Italian government in the post-war period has been 14 months, and we see no reason why this one should prove an exception.
■ Stephane Monier is the chief investment officer at Lombard Odier Private Bank.