It was a long time coming, but after months of internal strife, Italian strongman Matteo Salvini has finally pulled the plug on the fractious coalition with Five Star.
“The government no longer has a majority”, Salvini said Thursday. “Elections are the next step”.
This was tipped on Wednesday and all but confirmed earlier in the session. Salvini had threatened to meet with President Sergio Mattarella, a precursor to dissolving Parliament, in the event Giuseppe Conte didn’t acquiesce to League’s demands to replace Transport Minister Toninelli and, reportedly, Finance Minister Giovanni Tria. Italian bonds sold off on the news.
Read more: Matteo Salvini May Collapse Italian Government Imminently
“We have never asked for more cabinet posts, and we want to mark our distance from any hypothesis of a cabinet reshuffle”, League said in a statement on Thursday, prior to Salvini’s apparent pronouncement that he’s reached the end of his rope.
“For too long there have been different visions on fundamental issues for the country such as major public works, infrastructure, economic development, tax cuts, regional autonomy, energy, justice reform and the relationship with the EU”, League proclaimed, adding that “every new day is a lost day [and] for us the only alternative to this government is going back to Italians with new elections”.
So, that would appear to be that.
As mentioned in the linked post above, Italian bonds have benefited handsomely over the course of the reinvigorated hunt for yield. Indeed, 2-year yields in Italy went negative early last month.
10-year yields are the lowest since 2016, and as you can see from the annotations in the top pane below, we are a country mile away from levels seen during some of last year’s more harrowing moments.
To be clear, it’s hardly a “surprise” that Salvini has finally decided to take the plunge. As noted first thing Thursday morning, every indication was that the moment of truth had arrived.
Still, we’ve seen this movie before, only to have the populist firebrand (easily the country’s most popular and powerful politician) walk things back from the precipice.
According to a statement e-mailed to the press, Five Star’s Luigi di Maio is calling for parliament to approve a law that trims the number of lawmakers prior to a new vote.
EURCHF fell to a new low for the day when the news hit.
This will raise the stakes for the ECB into the September meeting. Although it’s possible that Salvini’s economic agenda won’t be the worst thing in the world compared to the current setup that has to incorporate Five Star’s expensive electoral promises, Matteo is notoriously abrasive.
Once he’s consolidated power, Brussels will likely have to deal directly with Salvini or his emissaries, with no buffer. That sets up quite a bit of headline risk if and when budget tensions flare anew. Italy dodged the disciplinary procedure last month, but the market hasn’t heard the last of that story, you can bet on that.
It will be interesting to see how BTPs trade. Again, yields have come in dramatically amid the global bond rally, so this will be a big test not only of how predisposed folks are to losing their minds during a wholly predictable bout of Italian political turmoil, but also of liquidity, which one certainly imagines will be thin.
If we get a rerun of the May 2018 meltdown, there could be implications outside of Italian assets.
Oh, and note the time stamp – this has been blatantly obvious almost from the beginning:
Salvini talking about Five Star: "The drama has been going on too long and is wasting everyone’s time."
I see a future where he tries to consolidate power. Either that, or the rest of the government tries to get rid of him. Will be hard. League's support > 5 Star in polls.
— Heisenberg Report (@heisenbergrpt) October 20, 2018
