Italian Political Uncertainty Could Impact International Investors

Luca Raffellini, Vice President and Head of Financial Services at Frost & Sullivan, appraises the political situation in Italy to understand its impact on international markets in the past few weeks and in the future.

The early March elections in Italy brought to power a set of political parties characterised by pronounced Eurosceptic sentiments. Just after the elections, international markets seemed surprisingly unresponsive, both to the political crisis and to Italy’s struggle to form a government.

‘No more. Now, as the long-term implications of the “contract of government” become clear, foreign investors have woken up, beyond the specialised circle of bank analysts, and are penalising Italian assets heavily’, said Raffellini.

In the bond market, the spread (i.e., between the 10-year Italian treasury papers and the equivalent German bund) jumped to 300 points before coming back down.

‘However, while that’s high, it is not especially worrying because BTP yields are only one metric—a symptom, not a cause—and a useful indicator indeed, but it doesn’t tell us whether that reflects sovereign solvency, currency risk, concern about GDP growth, and so on. In any case, we are still far from the 600 points level of the last Euro crisis in 2011’, said Raffellini.

Attention has been recently rekindled on the Euro and the dismaying possibility of Europe’s third-largest economy exiting the common currency one day.

A scenario in which Italy was to exit the Eurozone altogether is possible in theory but extremely unlikely in practice. For sure it has not been priced by the markets, in equities nor in bonds, and certainly not in forex’, said Raffellini. ‘From conversations with Frost & Sullivan’s clients, the prevalent investment thesis hinges on these assumptions: Brexit has shown how long it takes to disentangle from EU structures, therefore a return to the Lira would take a long time and prove so patently damaging, and that a government attempting a Euroexit would be voted out well before the process could be completed’.