Spread BTP-Bund: an article by Bloomberg reported the scenario signed by Giovanni Zanni and Imogen Bachra of Natwest on the differential between the rates on Italian bonds and German 10-year Bunds.
According to Natwest, the most likely scenario for the presidential elections sees Mario Draghi remain prime minister and a non-divisive figure – therefore not Silvio Berlusconi – become president of the Republic. In this case, the differential should narrow, according to the report written on January 13th – by 7 basis points.
Of course, the ideal scenario would be the status quo, with Sergio Mattarella ready for the Mattarella bis: in this case the spread would be reduced by 9 basis points.
The spread would also decrease in the case of a partisan president of the Republic (such as Berlusconi), if Mario Draghi remained prime minister: in this case, however, the decline would be reduced to -5 basis points. From Natwest they underline that, if Draghi accepted and became head of state, “the result would be positive also in this case”, always if the current government majority were confirmed.
The key risk would arise instead if “the coalition lost its focus on reforms and the parties focused all their efforts on the next political elections, leaving behind the conciliatory tones we have witnessed so far”: in that case, according to Natwest, the spread is would expand by 3 basis points.
Furthermore, a divisive president “would destabilize the ruling coalition, hindering progress on reforms”: and here Silvio Berlusconi’s candidacy for the Quirinale obviously represents a problem, given that tensions could also lead to early elections.
For Natwest, early return to the polls is not part of the most likely scenario, however, since it is something that MPs, in general, are not pawing at the moment.
In the event that – another scenario – Draghi neither becomes president of the Republic nor remains president of the Council, in the face of a partisan presidency, the BTP-Bund spread could widen by 10 basis points; and 20 basis points if there were early elections.
Looking short, Natwest believes BTPs are likely to remain under pressure given “the political nervousness, which comes at a time when markets are still trying to digest the prospect of a less generous ECB in an environment of still high supply.” bond.
At the same time, strategists argue that Italy’s long-term fundamentals are still solid and that the end of the ECB’s PEPP is “less frightening than feared”.
In fact, the note states that “solid growth, together with higher inflation, the general dynamics of government equilibrium and the persistent low interest rate environment are providing support for Italy’s fiscal sustainability parameters”. And that “these are important variables to consider, more and above any political consideration”.