ITALY

Italy's 5-Star and League agree a governing pact – but can they rule?

Althea Spinozzi

Fixed Income Specialist
Althea Spinozzi joined Saxo Bank in 2017, and serves as Fixed Income Specialist. Althea produces Fixed Income research and works directly with clients in order to help them select and trade bonds. Because of her background in leveraged debt, she is particularly focussed on high yield and corporate bonds with attractive risk and return.

After weeks of protracted negotiations, Italy’s far-right League and populist 5-Star Movement have finally agreed a common platform for government. They still need to agree on a prime minister and furthermore, the pact is contingent on the approval of their respective party memberships as well as that of the Italian president. The text of the agreement is far from transparent, with much ambivalent wording, but here’s a quick look at some of the most salient points and the timeline for what will be the next steps.

Economic proposals in final government draft:

- Reduction of the public debt without using austerity measures. The final text doesn’t mention any longer the forgiveness of €250bn by the European Central Bank, however, it says that the government will ask that the bonds acquired by the ECB through quantitative easing be excluded from the calculus DEBT-GDP.
- Guaranteed minimum income: this was one of the flagship policies of the 5-Star movement, now it seems in the agreement the guaranteed minimum income will be available for citizens only for a maximum of two years.
- Flat tax of 15 and 20% for families and corporates. 
- New pension laws that would enable citizens to retire earlier. Cut to “golden pensions” above €5,000 if they are not justified by contributions.
- Alitalia airline must be saved and relaunched.
- Treno Alta Velocita’ (TAV )- the 5-Star party wanted to stop projects for the new Turin-Lyon high-speed train line (TAV). In the government draft it’s mentioned only the intention to discuss the project rather than halting it all.

Foreign Affairs:

- Removal of sanctions against Russia. It seems that the two parties have discussed the possibility to propose to the EU the withdrawal of sanctions against Russia. The Kremlin is pleased to hear the news
- Revision of EU treaties.  Parties wants to strengthen the role of the European Parliament.

Immigration
 
- Dublin Treaty to be challenged. Immigrants should be distributed throughout the EU instead  of being required to stay in the country where they first entered the EU. This point also calls for increased deportations. 
- Strengthening of domestic self-defence laws
- Removal of illegal Roma camps

And we cannot forget:

- Prime minister yet to be decided. Salvini (NL) confirms that neither himself nor Di Maio (5-Star) will be prime minister. A few names can be seen in the Italian press but the decision is not yet taken. It seems that Di Maio is still flirting with the idea to be prime minister himself. Until yesterday they discussed the possibility of taking turns.

May 18-19-20. 5-Star and Northern League parties to seek approval from their supporters.
- 18 May, 14:00. Salvini to return headquarters in Milan to brief senior officials.
- Throughout all the weekend the parties will be holding a vote in order to discover if their electorate supports the government draft they have been working on together. The 5-Star Movement will hold a vote online, while the Northern League will hold a vote in the Piazzas across the country.

May 21. Parties will meet President Mattarella.
- Mattarella has already mentioned that if the programme is not good enough he will need to set up a technical government that will govern Italy until the next elections. 

At this point it is hard to foresee whether Monday will be the decisive day. The Prime minister point has yet not been resolved and Italy’s President Mattarella reserve the right to set up a technical government if the proposed program cannot guarantee the governability of the country.

Although the idea to get €250bn of debt pardoned by the ECB has been binned, it is clear that the points outlined by the proposal are economically unsustainable and will cause deeper problems not only at the national level but even at the European Union level. The estimated cost of the policies can arrive to €125bn according to one of the leading Italian newspapers “La Republica” which will definitively weight negatively on the already highly indebted country, which at the moment has a debt to GDP ratio of 131%. These measures will definitively weight negatively on BTPS, and the spread between the Italian sovereign vs German bunds can reach levels last seen in 2011-2012 during the periphery-crisis where the spread spiked above 500bps. This could lead to weakness also in other European highly indebted countries such as Greece, which has plans where to end with the bailout this summer.

Regardless, even if the proposal passes as soon as next week, this government will most certainly not last very long. The 5-Star Movement and the Northern League have very different political agendas at heart, and a divorce even before the first year anniversary of this marriage cannot be excluded, after all, from 1993 until today Italy had 13 administration averaging a new one every 23 months. It is very unlikely that this administration could beat the benchmark.

Spread between BTPs and 10-year German bunds (source: Bloomberg):

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