Italy: Elections to yield a coalition government - Nomura

Analysts at Nomura still think Italy’s elections will eventually yield (after several weeks of negotiations) a coalition government of centre-left and centre-right parties.

Key Quotes

“If we are correct, fiscal policy will probably be loosened as all these parties are proposing tax cuts and higher government spending. That should help keep the economy humming for a little longer, not least with the broader eurozone (and world) economy likely to remain in rude health in the coming months. Whatever the outcome, however, Italy’s longstanding macroeconomic problems – weak productivity growth, poor competitiveness, high sovereign debt levels and high non-performing loans (among others) – are unlikely to see any great improvement any time soon. That’s largely because the reforms that are necessary to tackle these problems are not high on most politicians’ agendas.”

“For Europe more generally the good news is that anti-EU referenda are off the table no matter who wins this election. The bad news is that Italy’s festering imbalances still expose not only its own economy to longer-term economic (and political) instability but that of the broader eurozone as well.”

“For market strategy, the recent widening of Italian and peripheral spreads in general is a delayed response to the broader risk-off tone evidenced in other asset classes. The 10- year BTP/Bund spread is now within the 140-160bp range that we consider around fair value ahead of the Italian elections. However, this is wider than our projections for the spread in our baseline election scenario. Hence, we look for an opportunity to enter a compression trade should the widening move expand further. We maintain our short SPGB versus DBR and BTP via a 1:2:1 credit barbell.”