Market Extra: Markets deliver verdict on new Italian government
Markets reacted calmly to confirmation that a far-right coalition led by Brothers of Italy had won the Italian election, with traders relieved that a low turnout and lack of a landslide reduced the chances of radical action.
The euro EURUSD,
The turnout was 64%, notably less than the previous record low of 73% in 2018.
“This is close to what opinion polls had indicated ahead of the elections. However, if results are confirmed, the alliance missed reaching a two-thirds majority which would have allowed it to pass constitutional amendments without consulting voters in a referendum,” said Felix Huefner, economist at UBS, in a note to clients.
Huefner noted that the right-wing alliance’s joint manifesto included proposals for higher spending, such as an increase in the minimum pension, hiring subsidies, and income tax cuts.
“There are no official cost estimates, but some reports point to a potential volume of €80bn (4½ % of GDP). This suggests potential risks to the debt outlook (150.8% of GDP in 2021) if the plans are implemented,” he added.
Moody’s, the credit agency, said in a note late on Sunday that the rating on Italy’s debt pile was “vulnerable to negative growth, funding cost and inflation developments.”
Such concerns had caused some selling of Italian government bonds in recent months, pushing the spread with benchmark 10-year German bunds above 250 basis points in July, as investors demanded more payment for taking on the risk of Rome’s paper.
However, traders have become more sanguine of late, betting that Meloni was less spendthift than her coalition colleagues in League and Forza Italia and the new administration would not break restructuring pledges and risk losing support payments from the European Union.
“The right bloc’s agenda has long pledged major tax cuts, but Meloni herself has recently warned against excessive fiscal deficits,” said analysts at Citi in a note.
“Pending large NGEU [Next Generation EU] disbursements create a major incentive for the next Italian PM to stick to the rule-book and not clash with the EU, at least in the very near term,” Citi added.
The Italian 10-year bond yield (BTP) TMBMKIT-10Y,
Milan’s FTSE MIB stock index I945,
The euro EURUSD,
“The key steps to watch over the next month are the choice of the finance minister (discussions will start soon) and the new government’s first budget law (to be submitted to the EU as soon as the new government is sworn in, likely by end of October),” said Citi.