What Could Go Wrong? Italy Is The Proud Owner Of A Populist Coalition Government


Italy has themselves a bonafide populist government.

It’s been in the works all week, but Five Star and League have officially agreed on a final government contract. Here are the details via Di Maio’s Facebook and translated by Bloomberg:

  • ‘Limited’ deficit spending, review of EU fiscal rules, review of bail-in rules
  • Plan calls for redefining of lender Monte dei Paschi di Siena’s mission
  • 15% and 20% tax rates for companies and people
  • End to Russia sanctions
  • Scrap Fornero pension reform
  • Guaranteed minimum income for poorer Italians

Italian bonds came under pressure again. 10Y yields have risen some 35bps this week:


And hit 2.22 at one point on Friday:


Apparently, 2.40 is the level to watch here, but as noted on Thursday, it is not at all clear that the ECB would risk letting this get out of hand just as they attempt to navigate the Q1 soft spot in eurozone growth. The risk of “quantitative failure” is already back on the table thanks to the deceleration in the euroarea economy and while it would probably take a lot more in the way of rising yields and spreads to bunds blowing out for Draghi to postpone the assumed September APP wind down, it seems highly unlikely that he would sit on his hands in the event periphery spreads widened out materially. While we’re back to a four-month high there, it’s nothing in the grand scheme of things:


You’re reminded that Di Maio and Salvini accused the market of trying to “blackmail” them earlier this week, despite the fact that in reality, the market has been prevented from pricing in political turmoil and populist turns by the ECB’s PSPP and CSPP.

Hilariously, Italian stocks are still one of the best performing markets in the Western world in 2018, despite having finally decided to selloff this week when the worst case populist scenario was realized:


So you can go ahead and look forward to more fretting over this and you can also look forward to plenty of accusations from Di Maio and Salvini about how the evil “eurocrats” won’t let them spend their way to oblivion.

Oh, and for whatever this is worth, Silvio Berlusconi now says he’s “very distant” from Salvini.


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