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Will Italian Join The Party?

30 May 2017 by lberuti

After the US and the UK enjoyed a 3 day week-end, Italian election anticipation was the main story to disturb the quiet. From being an outside chance until last week, the possibility of snap elections in Italy in the Autumn has gathered pace, first with talks of an agreement between Renzi and Berlusconi last week, then more surprisingly, over the week-end, with the support from Grillo on a so called “German style proportional representation electoral law”. They seem close to an accord on a voting system where parties securing 5% or more of the votes would be guaranteed to win some seats. A deal is not yet finalized, but these three have an overwhelming majority in parliament and can impose an agreement. If the voting system can be approved in the next few weeks - and a draft budget for 2018 agreed upon before the elections are called -, Italians could be asked to go to the polling stations roughly at the same time as Germans, towards the end of September 2017. Among the possible outcomes, a grand coalition between Renzi’s PD and the center right appear likely, but a hung parliament potentially leading to new elections is a distinct possibility. Investors started to price some of this uncertainty and sent the whole Italian banking complex wider (the 5-year risk premium of the senior debt of Mediobanca was 11.5bps wider at 159bps, Intesa +10bps @ 129.5bps, Unicredit +8bps @ 142bps), which in turn dragged European financials 3bps wider on average at 66.5bps.