Populism strikes again.
As you’re aware, Italy is going to go ahead and experiment with an outright populist government and the market is concerned about that for obvious reasons. Jitters have been building over the past week as Di Maio and Salvini attempt to cobble together a government two months on from inconclusive elections.
Although Italian equities and bonds performed admirably earlier this year considering the circumstances and considering the return of equity volatility in February, they’ve stumbled of late, as investors are balking at the prospect of populist parties running the show. We’ve talked about this a number of times lately (see here and here), but it’s back in the spotlight on Wednesday after HuffPo reported that according to a 39-page draft document detailing Five Star and League’s coalition program, they plan to ask the ECB to forgive some €250 billion in Italian debt.
As Reuters notes, it also “calls for a renegotiation of Italy’s European Union budget contributions, an end to sanctions against Russia and plans to dismantle a 2011 pension reform that raised the retirement age.”
Obviously, all of this is bad for Italian bonds and they’re selling off on Wednesday:
And Italian stocks are under a ton of pressure, extending losses after League and Five Star said they’d meet today to seek a “final deal” on a government program. Apparently, they’re “90%” of the way there, which means Italy is roughly 90% fucked.
Salvini, talking on Facebook (of course), said he has an agreement with Five Star on pension reform and of course he threw the seething masses a bone with a nod to “defending borders.” He did caution, however, that this whole thing will be “without miracles, there is no Superman or Batman or Robin or Spiderman.”
Yeah, no shit.
The BTP-bund spread is of course blowing out:
“This is all fairly disruptive stuff for Italian bonds,” SocGen’s Jason Simpson said, adding that “the markets had been assuming that they would tone down some of their more radical views.”
Right. But you know populists and their radicalism – they just contain themselves. Here’s Goldman:
From an economic perspective, however, if the political manifestos of the two parties are any guide to the policies that a Five Star — Lega government would pursue, the upcoming budget law for 2019 would consist of lax fiscal policies that would (i) lead to the deterioration of the public finance outlook and prevent a decline of the stock of public debt, and (ii) increase the probability of ratings downgrades. Moreover, if lax fiscal policies were to be pursued, leading Italy to breach the 3% deficit rule, these policies would create tensions with the European Union and be a source of disagreement with the European Commission. Even if Five Star and Lega have toned down their anti-European rhetoric, tensions between Italy and European partners would also certainly complicate the efforts at the EU level to make further progress on EMU integration.
Barclays had something similar out earlier this week. “Unless properly backed by strong/credible financial and economic measures, the proposed economic programme, as reported by media, agreed between 5SM and L would likely result in substantial fiscal slippage,” the bank wrote.
Yeah, and see when you combine this with lackluster incoming data in Europe, you’re left to wonder whether the ECB can really afford to wind down APP completely by the end of the year.
“Whatever it takes”, and such.
(Citi)
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