Amid chatter of rifts among the populist leaders and a technocrat premier-designate who seems incapable of moving forward, deciphering what happens next in Italy is hard - as evidenced by the early gains in Italian bonds starting to be erased.
Italy's 2Y Yield is back at the critical 2.00% threshold once again...
Even Goldman's crystal ball is unable to see the near future, as they explain that there are several possible ramications of the Italian political deadlock.
One possible outcome is that Mr. Cottarelli presents President Mattarella with a list of prospective ministers, the majority of whom would likely be technocrats. If President Mattarella accepts the proposed ministers, the government would be sworn in and ask for a condence vote in Parliament.
As we have previously discussed, in our view the government would be highly unlikely to win such a condence vote as Lega and the Five Star Movement (5SM) have indicated they would not offer their support while Forza Italia (the political party of former PM Silvio Berlusconi) has said it also would not vote in favour of such as arrangement; at the same time some members of Partito Democratico (the centre-left party of former PM Matteo Renzi) have suggested they would abstain. Should the condence vote fail (as we expect), a caretaker government led by Mr. Cottarelli would hold ofce for a short period of time until new elections take place, likely right after the summer.
A second possible outcome is that Mr. Cottarelli hands back the mandate without forming a government. In this situation new elections would be held soon, most likely at the end of July, and the government of incumbent Prime Minister Mr. Gentiloni would continue to be in ofce and run day to day government affairs.
A third possible outcome, as reported by local media, is that the leaders of Lega and the Five Star Movement form a coalition government with the aim of winning a condence vote in Parliament. Should Mr. Cottarelli hand back the mandate without forming a government, the President of the Republic could consider granting a mandate to Mr. Salvini (Lega), Mr. Di Maio (Five Star Movement), or another person as indicated. In this situation a few more days would be needed to learn whether or not a government would be formed.
Against this backdrop, Goldman believes political uncertainty in Italy will remain elevated for quite some time and Italian asset prices will continue to be under pressure.
We expect investors will remain concerned about the:
(i) economic policies that Lega and the Five Star Movement could implement if they come into ofce,
(ii) subsequent impact on debt sustainability and ratings downgrades, and
(iii) commitment by such a coalition government to Italy’s participation in the European Union and membership of the Euro area.
Coming just day...