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Saturday, 16 December 2017

Silvio schism?

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Divyang Shah on what a possible split in Berlusconi’s party means for markets

Italian politics is back on the radar screens, but the potential for a split within Berlusconi’s PdL party means that PM Letta’s government could retain support.

We expect to see plenty of focus on how much real backing there is within the PdL for Berlusconi, with attention on the meeting between the two today ahead of a likely confidence vote on Letta Wednesday.

When PdL members threatened to resign last week, it was uncertain how many would actually follow through. Berlusconi’s decision to order his five ministers to resign leaves us with the question as to how willing PdL members are to withdraw support from the prime minister.

The seeds of doubt were sown last week when we heard from some PdL members that it is still up to each individual member to decide, and it is interesting that the five ministers on Saturday expressed reservations or even outright disagreement over the move, according to a Reuters report.

Many PdL members will be aware that the special Senate committee vote on Oct 4 will open the way for Berlusconi to be expelled from parliament in a full vote on the Senate floor by the middle of the month.

Continuing to support Berlusconi has its own set of uncertainties for PdL members. Markets will be keeping a close eye on today’s meeting between Berlusconi and PdL parliamentarians to gauge the prospects of a split within the party, which would bring other more negative scenarios of early elections and prolonged market turmoil.

What happens if there is insufficient support is where things get tricky, as president Napolitano is not keen on calling early elections. The added uncertainty is over the role of M5S, which surprised in the elections early this year but has lost some of its support. There will be uneasiness over the risks to both the political outlook as well as deficit targets which could start to more negatively impact eurozone bond markets.

Thus far, the level of concern expressed by the market has been relatively controlled, and while the 10-year Italy/Germany spread has largely moved sideways, the concerns are being expressed on 10-year Italy versus Spain. Playing for this relative 10-year Italy/Spain widening to continue seems attractive, as the cost of carry on the position is less than trying to short BTPs against Bunds.

 

 

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