Italian government crisis? Not a big deal…
Head of Macro Analysis
Summary: Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis.
Market reaction to Italy’s Prime Minister resignation has rather been quiet. Yesterday, Italy-Germany government bond spread was moving lower, around 200 bps, and there was no sign of contagion to other PIIGS countries. Saxo model of periphery weighted spread to Germany (which is GDP weighted) was also down, at 177 bps, close to the lowest levels reached this year.
Investors seem to believe that, in a central bank world, political risk does not matter as long as it is not linked to EZ/EU membership. On the top of that, expectations of further ECB stimulus in September, which could consist in a new QE package coupled with lower deposit rate, is also pushing down interest rates.
Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis:
1/ A grand coalition that could gather the PD and the M5S with potential participation of Forza Italia (this scenario, that was quite unlikely a few days ago, has been intensively discussed since yesterday). It would be the most market-friendly option and it seems to be supported by the European Commission ahead of budget discussion.
Market impact: LOW. Italy-Germany gov. bond spread around current level, at 200 bps.
2/ A caretaker government whose main objectives would be to pass 2020 budget and implement more tightening in order to be in line with the European Commission’s deficit target. At first, it looks more market-friendly than the previous option, but this government is unlikely to last long. New elections would need to take place next year. This option would be a form of “extend and pretend”.
Market impact: VERY POSITIVE (at first). Italy-Germany gov. bond spread below 200 bps.
3/ Snap elections in Q4 2019. This option implies an elevated risk that Salvini could be in a position to form a right-wing coalition, which would increase tensions with the EU and other European governments, notably France.
Market impact: NEGATIVE. Italy-Germany gov. bond spread back to 300 bps.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.