Italians will be called to the polls on 25 September and it is the first time in over 70 years that political elections have been held in the second half of the year. Elections are a complicated puzzle to solve, but
So says Matteo Ramenghi, Chief Investment Officer UBS WM Italy who identifies two risks from this electoral round.
Italian elections: the risks to avoid
The first to avoid is that of a deterioration in public accounts which undermines the market’s confidence in Italy. It was the most feared risk with the first government of the legislature in 2018 which, however, after a long negotiation with Europe, finally settled for a 2% deficit target. Indeed, every year the budget law must be approved by the European Union (EU) and, more than a decade after the start of the public debt crisis, it is likely that all political forces have realized that too high a deficit, if not coordinated with European funds such as the Recovery Fund, it does not help growth, but can actually create a downward spiral.
The second risk, continues Ramenghi, is linked to a slowdown in reforms, starting with liberalizations, and to the implementation of the Recovery Fund. So far Italy has fully respected the roadmap. If the elections and subsequent formation of the government slow down the race, there could be a delay in the disbursements of grants and loans, or even a suspension, if policies contrary to the agreed reforms are pursued. Since Italy is the main beneficiary of the Recovery Fund, it would be a matter of lost points of GDP and a strong damage to the country’s credibility. The spread of ten-year BTPs with respect to Bunds has more than doubled due to the decision of the European Central Bank (ECB) to raise rates and the fall of the government. It currently stands well above 200 basis points (bps), a level that we believe remunerates investors for the risk. However, the uncertainty linked to the elections could push it further upwards. In recent days, some rating agencies have revised their outlook on Italy downwards.
At this stage, the ECB is unlikely to intervene in the bond market to contain the spread, says the expert, but in the event of significant distortions it could make its presence felt. “From an economic point of view – says Ramenghi – there is no doubt that to avoid a negative spiral the next government will have to push forward with reforms, starting with liberalizations; keep public accounts in order, progressively reducing debt; and respect the Recovery Fund schedule “.