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Power Corrupts Sometimes… Moderates Often

05 September 2018 by lberuti

Power corrupts, or so the old saying goes. Anyone watching the multitude of political dramas on television or reading about them in the papers may tend to agree. However, perhaps power also moderates. This trend towards moderation has been observed on occasion in Europe, with politicians previously considered firebrands tempering their views to economic and market reality once in power. We saw this with Syriza in Greece, and it is tempting to say this in the light of Italian risk. The latter received a shot in the arm from noise from the government that EU budget limits will be respected. Earlier in the week it was Giovanni Tria, Minister of the Economy, and now it is the turn of Matteo Salvini, Deputy Prime Minister, whose Lega party had been proposing a significant fiscal stimulus package. It is too early to be drawing a line under the Italian budget as details are sparse and commitments vague, but investors’ perception was that Italian risk maybe receding. After topping 290bps at the end of August, the BTP/Bund spread closed at 255bps tonight, and Italy’s 5-year risk premium came down 20bps to 237bps over the same period.