Wednesday, December 15, 2010

Italy: Berlusconi wins confidence vote, but political uncertainty remains

Today, PM Berlusconi won the confidence vote both in the Upper (by 162 votes to 135) and the Lower House (by 314 votes to 311).
While the outcome in the Upper House was widely expected, the ballot in the Lower House was a very critical test for the PM. As a matter of fact, Berlusconi was backed by a very thin majority (314 vs. 311 votes), which shows that the ruling coalition has lost its grip on power and weakened substantially over the last few months.

What can we expect going forward?

  1. As he reaffirmed soon after the vote, Berlusconi will most likely decide to remain in office. While this scenario would dissipate the uncertainty in the very short-term, political instability would likely re-emerge in the medium-term, as the government finds it hard to secure enough support to push ahead with its political agenda. Against this backdrop, Berlusconi may eventually decide to resign and early elections would be called at some point next year.
  2. However, we cannot rule out that Berlusconi might be pressured by the Northern League to immediately resign, in order to call early election as soon as possible and take advantage of the setback of Mr. Fini, who today was not able to avoid a spilt in his own party Fli. In this case, a reasonable date for general election might be next spring. Under this scenario, political uncertainty will be prolonged as well: under the current electoral law, and based on the most recent opinion polls, it would not be surprising to see a clear PDL-Northern League majority only in the Lower House, with the risk of political paralysis.
Our bottom line is that the final outcome of the confidence vote, while reducing the uncertainty in the very short-term, has certainly not reduced the risk of a stalemate going forward. However, as far as market implications are concerned, we don’t see a meaningful impact on Italy’s spreads.
Initial reaction of BTPs was fairly muted, confirming that national political issues should have a moderate impact on the spreads as long as fiscal stability in not endangered. The key driver remains the evolution of the sovereign debt crisis in the eurozone.
It is a fact, indeed, that Italy’s fiscal austerity is not in danger. This is because, under both of the two scenario outlined above, we see good chances that Mr. Tremonti will remain in charge of fiscal policy decisions. Anyways, any new government will be very much aware that unchanged commitment to fiscal consolidation is crucial to shield Italy from the contagion of the sovereign debt crisis.
Having said that, it is worth to recall that a medium-term scenario of prolonged political stalemate is not good news, as it will prevent the government, whatever it will be, from pushing ahead with the agenda of structural reforms that Italy urgently needs in order to increase its low growth potential.

No comments: