Italy Crisis to Re-emerge

Italy crisis will re-emerge, as the Senate agreed to set a date (2019-08-20) for the no-confidence vote against Prime Minister Conte in a bid to force a snap election as soon as Autumn.

The earliest that an Italian election could take place is mid-October. This would require Prime Minister Conte to lose the confidence with President Mattarella making a decision to dissolve the government, allowing for an election to be held within 45-70 days.

However, the key issue with regard to having an election in October is that it will coincide with the EU deadline for the 2020 budget draft (October 15th). As such, President Mattarella may be unwilling to dissolve parliament to pave the way for a snap election and potentially opt for a technocratic government with the sole task of getting the 2020 budget approved. Although, typically technocratic government have not tended to be widely favoured by voters.

The chart below show the spread between 10 Year Italian-German Bund:

Last week, 2019-08-09,  League Leader Matteo Salvini turned his back on the populist coalition by tabling a motion of no confidence in Prime Minister Conte at the Senate in a bid to force a snap election as soon as Autumn. This came after the Five Star party opposed the high-speed train link bill on cost and environmental ground, something which had been strongly supported by Salvini’s party. In reaction to Salvini’s announcement, Italian bond yields have once again been on the rise with the Bund/BTP spread widening, albeit not at the highs seen last year.

Early elections in October could see further widening of the Bund/BTP spread with the Italian assets under pressure given the uncertainties that this would pose with regard to the 2020 budget preparations. As such, this would also add a further bearish outlook for the Euro going forward with eyes on the 1.10 handle.

Source:

DailyFX, Justin McQueen, 2019-08-14, “Italian Election Monitor: Italy Crisis to Re-emerge Amid Risk of Snap Elections”