MFS: Election results threaten Italy's fiscal policy

MFS: Election results threaten Italy's fiscal policy

September 26, 2022

Italy Politics
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Annalisa Piazza, Interest Rates Strategist at MFS, comments on the results of the Italian elections.

The Centre-right coalition obtained a relatively large majority in Parliament after yesterday's general election, with the far-right Fratelli d'Italia winning around 26% of the votes.

Although a clash with the European Union is not imminent (Meloni already softened her anti-EU tone during the electoral campaign), we still see risks for fiscal stability in the medium term.

Meloni will need to give some concessions to her allies that promised tax cuts (Lega) and increases in pensions (Forza Italia) and face a challenging situation as slower growth and the need to provide some fiscal stimulus (as per the coalition's manifesto) will undermine the reconvergence of Italy's debt. In our view, tomorrow's multi-annual budget will already show an upward revision for the 2023 deficit (in the 5%-6% range vs 3.9% previously estimated).

Risks around the implementation of the Recovery and Resilience Plan (RRP) represent another challenge for the new government. We see downside risks for some of the 55 milestones and targets that Italy needs to meet by the end of the year to unlock a (net) EUR19bn payment in early 2023.

A delay could put even more pressure on domestic issuance. As such, delays and tensions with Brussels cannot be completely ruled out and volatility in BTPs will continue until the overall picture becomes clearer. Some alarms about future instability in the country's fiscal stance could lead to a bear flattening of the curve and underperformance against its peers such as Spain or Greece.

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