Amundi: Italy swimming in uncertain waters as PM Draghi resigns

Amundi: Italy swimming in uncertain waters as PM Draghi resigns

July 22, 2022

Italy Politics
Italië (03) Mario Draghi

This is a commentary by Amundi on Italy’s political crisis brought about by the resignation of PM Mario Draghi.

  • Italian government crisis: snap elections the most likely outcome. Prime Minister Draghi would remain at the helm of a caretaker government, until a new one is formed after the elections, but clearly government action will be constrained and able to handle routine activities only.
  • Economic implications: the draft budget law has to be sent to the EU Commission by mid-October for approval. If elections take place at the end of September, it is unlikely that a government will be in place to oversee the process according to these deadlines (recently, formation of a government took several weeks after elections). This scenario could mean that the 2022 budget is rolled-over into 2023. This would clearly be negative for growth, as no counter-cyclical measures and fiscal support could be activated if needed. Additionally, Italy has to deliver a series of reforms to access NGEU funds. Some of these reforms could, however, be within reach of a caretaker government in order to avoid any delay in the 2023 NGEU disbursement that could negatively impact potential growth.
  • Investment implications: despite recent political instability and the ECB’s bold move in hiking rates by 50 bps, market reaction on Italian BTPs has been constrained. The new transmission Protection Instrument (TPI), which includes eligibility of public and private debt, temporarily eased pressure on the BTP. Investors have seemingly evaluated it as a powerful new tool, that was approved unanimously. However, we believe that uncertainty and volatility on BTPs will remain high in the coming weeks. It’s hard to imagine the ECB will use its new tool to address country-specific risks stemming from political turmoil. The conditionality embedded in the TPI, for example explicit compliance with commitments submitted in the Recovery and Resilience Plans or the reference to fiscal sustainability, clearly states that the tool’s objective is to limit the negative impact of higher rates on financial conditions. Therefore, we maintain a neutral exposure to BTPs, and look for better entry points and/or a clearer outlook regarding the election calendar.

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