No white smoke coming from the first round of voting for the election of the President of the Republic. The majority of the parties indicated that they should vote a blank ballot pending the Letta-Salvini summit to seek a convergence on the name for the post-Mattarella.
From the point of view of the markets the element of greatest uncertainty concerns Draghi’s future and the absence of a shared candidate could lead to tail risks on the stability of the country. As he points out today Barclays, if on the one hand the positive scenario is that which sees Prime Minister Draghi as the new Head of State without triggering surprise elections, the other negative is based on the possibility that Prime Minister Draghi resigns before the end of the legislature.
Dragons yes, Dragons no
According to Barclays, the basic scenario remains that of a “good” outcome with Prime Minister Draghi elected president and a unity government that continues the agenda of the current government; An institutional president elected by a very large parliamentary majority with the government of Prime Minister Draghi which lasts until the end of the legislature in 2023 can also be welcomed.
However, analysts reveal a certain difficulty in identifying a candidate supported by the parties of the left, center and right, thus increasing the possibility that Prime Minister Draghi will be elected president as a last resort. The likelihood of “bad” or “ugly” scenarios, they say by Barclays, also increases for the to date there is no real alternative based on consent. While Prime Minister Draghi defined himself as “a grandfather at the service of the institutions”, concretely the former ECB number one will continue his action at the helm of the executive only if the political context allows the implementation of the government agenda in a timely manner and non-confrontational. This should not be taken for granted and Barclays finds it troubling that some political parties, or fractions of parties, have opposed the possibility of Premier Draghi becoming president and / or proposing a government reshuffle after the election.
Should the “negative” scenario materialize, there would probably be too negative repercussions for the future of European integration, the Italian economy would also weaken as financing conditions worsen and concerns about the debt sustainability of the country.
Short and long term implications
The global credit strategies team of Algebris. “The market fluctuates between two possibilities: an election of Mario Draghi as president or a guided election of a high-profile person – remarks Algebris -. The first hypothesis would represent a long-term positive turnaround for Italy, as Draghi would benefit Italy’s governance and reputation for another seven years, instead of just one remaining year of his term as premier. However, this might generate some short-term volatility, given that the post of premier would be vacant, opening up the possibility of early elections. A high-ranking profile would avoid the short-term risk, but could generate uncertainties in the long term, especially since in this case the 2023 elections could be coupled with the tightening of the ECB ”.
If Draghi is elected, Algebris adds, it could lead to a political agreement regarding a Technical “government of care”, aimed at leading the country to the 2023 elections. “Therefore, we consider the risk of early elections to be relatively low. BTP spread volatility should therefore remain subdued for now, although we could see some 20-30bps of broadening over the next week given tight initial levels and rate direction. We continue to support a poor risk / reward ratio in Italian BTPs, as tight spreads benefit from the ECB’s 35% ownership in the asset, and could quickly turn around once the tightening signals meet the noise of the elections at the end. of 2022 “.