Sunday, 27 May 2018 16:20

"A Toxic Coup Narrative": Why Italy's Political Crisis May Be About To Explode

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On Friday Europe experienced an existentially terrifying "deja vu" moment straight from the 9th circle of Europe's 2011/2012 sovereign debt hell, when first Italian (and then Spanish) yields exploded amid fears of political chaos in the Eurozone's 3rd largest economies, coupled with the threat of an imminent collapse of the Rajoy government in Spain, the 5th largest economy. But while Spain is a late entrant to Europe's "political chaos" soap opera, all eyes remain on Italy where not only are short-term rates at level that MF Global would go Chapter 22...

... but the BTP-Bund spread exploded well beyond Goldman's "contagion" threshold of 200bps...

... while the scariest chart of all revealed that Italian redenomination risk is now at an all time high, reflecting the reality of Italy's 'Mini-BoT' parallel currency concerns.

However, if it was the market's intention into scaring Italy's political system into submission, the same way it did in 2011 when the ECB got Sylvio Berlusconi to "quit" in just a few days as Italian bond yields exploded, it has failed, and according to the latest development in Europe, the Italian crisis may be about to get much worse.

Newly appointed Italy Prime Minister Giuseppe Conte

For those who missed it, Italy entered the weekend with the country deadlocked in what may be a Euro-defining clash whether euroskeptic professor, Paolo Savona, strongly endorsed by the League party, is allowed to become the country's next economy minister. Here are the latest troubling details from Leonardo Carella:

The nomination of the designated Finance Minister, Paolo Savona, is being held back by the President of the Republic - a prerogative he formally has but that has rarely been exercised - reportedly over Savona’s anti-EU views.

From President Mattarella’s point of view, Savona, an 82 year-old professor who served in Ciampi and Berlusconi’s administrations, would send the markets out of control and would bring Italy to the brink of open conflict with the EU.

From Lega’s point of view, the nomination of Savona was one of their major wins in the coalition formation game, and the only guarantee of a strong anti-EU slant to government policy, after the coalition contract’s sections on Europe were heavily watered down.

Salvini just tweeted that he is “really angry”. M5S is, for now, supportive of their coalition partner.

This is how a constitutional crisis begins. The possible scenarios now are:...

  1. Most likely, President Mattarella gives in under public pressure and threat of a new election. If Mattarella’s worries are correct, we’re in for a rough ride, but the crisis is averted.
  2. If Mattarella and the coalition partners hold firm, we may be set for new elections, with M5S likely to repeat April’s success and Lega likely

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