Italian stocks, bonds recover as populists await approval of new PM
Italian stocks were on the front foot on Tuesday as the anti-establishment Five Star Movement and the anti-migrant League parties looked for their 'unknown' prime ministerial candidate to be formally approved by president Sergio Mattarella.
After leaders Matteo Salvini and Luigi Di Maio both ruled themselves out they decided to back Di Maio's personal lawyer Giuseppe Conte, a low-profile professor of law at the University of Florence without any political experience.
Mattarella summoned the leaders of the lower and upper houses of Parliament to meetings on Tuesday after expressing concerns about state finances and Italian’s savings under the policy programme put forward by the newly formed coalition, with discussions over increased fiscal spending threatening the terms of the Maastricht Treaty.
Leaders of the two populist parties accused investors of "blackmail" after yields on Italian 2-year debt climbed to their highest level since 2015 at the start of the week, with the 10-year bond yield having risen nearly 70 basis points since the start of the month to above 2.32% for a spread over German debt of 189 basis points, the highest level since last June.
But on Tuesday the FTSE MIB index climbed 0.45% in the first few hours of trading to 23,168.5, having fallen 1.6% the day before. Italian yields also dropped off their 14-month highs, down two basis points on Tuesday.
“As it stands it is not clear how much of the coalition’s fiscal mandate will be implemented," analysts Rabobank said, seeing cracks in European monetary union re-appearing. "This week, talk that the government could attempt to issue short term credit notes ‘mini-BOTs’ to finance extra spending was further undermining confidence in Italy’s fiscal outlook.”
Jasper Lawler, analyst at London Capital Group, said: “Concerns have been rife that the new Eurosceptic, populist coalition will tear up the EU rule book, potentially putting Italy’s membership to the bloc at risk. The coalition’s choice of PM candidate Giuseppe Conte has also caused some fright, given his lack of political experience.”
The market's main concern about the new coalition are the plans to radically increase public spending at the same time as cutting taxes, despite the country already having the second largest public debt in the eurozone, at 130% of GDP.
The selection of Conte has also generated mistrust from certain EU officials. The Guardian reported one official saying that “nobody knows who he is and he is not even a high-profile academic”.
The law professor is behind the Five Star party’s pledge to get rid of over 400 “useless laws”.
Mattarella has to give his formal consent for the proposed new prime minister, programme of policies and the possible cabinet before the government is sworn in.
Some commentators have said the rising prices of the Italian bond market are similar to the Greek debt crisis in 2015 which almost led to “Grexit”. Fears that Italy might take the same path as the UK are rising, even though both anti-establishment parties dialed down their eurosceptic rhetoric before the March elections.
JP Morgan was sanguine about the effect for the euro from Italy.
"The hurdle for Italian politics to alter the medium-term outlook for the EUR was high," analysts said, "only if developments would appear to lead to the possibility of Italy abandoning the single currency would we expect EUR to have to price in significant risk premium, in addition to the de-pricing of ECB normalization which would presumably happen."