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Italian political crisis ; recap and opportunities.
Sunday 3, June 2018

Italian Political Crisis:Recap and Opportunities

Marian Ross 2

Markets were roiled by Political upheaval in Italy and the threat of a trade war between the U.S. and China. Today we re-cap exactly what happened in Europe and remind investors that amidst every crisis, opportunities are available.

 

Timeline of events

  • Inconclusive elections on March 4, 2018 - no party wins a sufficient majority to take control of Parliament. Election results were as follows: The League (37%), Five Star (32.6%), and the incumbent Democratic Party (22.8%). The Five Star movement is known for its anti-European Union rhetoric and desire for higher public spending - considered a far “left” party. The League built its platform around a strong anti-migrant policy and anti-austerity measures.
  • March - May 2018: The Five Star Movement and the League spend 3 months trying to form a coalition will Government and fails. The President of Italy rejects their nomination for Finance Minister.
  • May 29, 2018: President of Italy tries to appoint a non-partisan Government but meets resistance: Due to failure to form coalition Government, President Sergio Mattarella has appointed a Carlo Cottarelli to try to form a non-partisan administration to lead the country until new elections are held.  Cottarelli is a former executive director at the IMF and his nickname is “Mr. Scissors” - derived from his strict approach to budgeting. However, the League and the Five Star movement (who together control the majority of seats in Parliament) are expected to block this appointment by voting AGAINST this cabinet.  
  • May 30, 2018 - The President gives the political parties more time to form a Coalition Government: The President permitted the League and the 5 Star movement some additional time to agree on a Cabinet before he appoints Cottarelli. Italian bonds rallied on the news.
  • May 31, 2018 - The coalition:  The Five Star Movement and the League parties reached an agreement on a Government team. They  

 

Market reaction

  • Early this week, safe haven assets such as the US Treasury rallied in price while Italian stocks and bonds (sovereign and corporate) fell dramatically in price. The European stock market also declined. However, by Thursday, Italian stocks and bonds recovered slightly.
  • Why are the markets worried? The proposed policies of the populist parties could have wide reaching negative consequences for the economy. The coalition of populist political parties is seeking to drastically reduce taxes, introduce an expensive universal income and reduce the retirement age. According to Bloomberg Intelligence, these plans will cost between 65-100 billion euros per year and could increase debt to GDP from 130% now to 177% by 2027.
  • Moody’s puts sovereign debt on review for downgrade: On May 25th, Moody’s put Italian Sovereign debt on review for a credit rating downgrade as a result of “the fiscal plans of the new Government and the risk that structural reform efforts stall and previous reforms are reversed”.  
  • Outlook: Italy’s economy has shown modest growth since the crisis thanks to small increases in consumer expenditure and gross fixed capital formation. However, the country remains vulnerable due to its high debt load and weak banking system. The negative sentiment around Italy has led to a broader sell off in European assets. There are certain to be buying opportunities elsewhere in Europe as a result of the contagion. 

Marian Ross is an Assistant Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

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