On Sunday 25 September, the Italians will be called to the polls and the predictions give as possible the victory of the right-wing coalition composed of Giorgia Meloni’s Brothers of Italy, Matteo Salvini’s League and Silvio Berlusconi’s Forza Italia. At this point it is difficult to predict what risks such a coalition will bring to the country, and it depends on whether Giorgia Meloni will be able to form a majority with two or three parties, says Mondher Bettaieb-Loriot, Head of Corporate Bonds at Vontobel. According to the expert, for Italy’s economic prospects, a majority exclusively with Forza Italia would be cheaper.
The Italian electoral system has been shown to render the results uncertain and it would not be surprising if one emerged coalition of broad agreements; in that case, the markets would react positively, as it would be seen as one continuation of the fiscal policies of Mario Draghi. In any case, the new government will not have time to work out an entirely new budget for 2023 which will be presented by Draghi on the basis of an unchanged deficit target for next year. The different aid packages provided this year have been paid for with additional energy company taxes. This situation is expected to continue and therefore we do not anticipate further weakness in Italian government yields.
If the right-wing coalition wins, Giorgia Meloni should try to respect the fiscal rules of the European Commission and, in my opinion, should introduce any budget changes only gradually. For example, the flat tax it could cost only 13 billion euros in the first year if adopted, thus respecting the fiscal rules that aim to improve the budget balance by about 0.5%.
In conclusion, says the Vontobel expert, the current economic and debt situation of the country represents a challenge for the new government. “However, regardless of the outcome, the ECB’s new anti-fragmentation tool, designed to reduce fiscal risks with rising interest rates, appears to limit sovereign risk and I believe that the risk of a default of government bonds in Italy or in other peripheral countries is rather low ”concludes Mondher Bettaieb-Loriot.