The most important implication is that the budget law for 2018 would have to be approved by the new Parliament, at a great delay compared to the usual schedule, and a solution would have to be found to avert the VAT hike planned for January 2018……
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
In the past few days, the debate over the reform of the Italian electoral reform has undergone a sudden acceleration. An agreement is taking shape among the leading three political parties to adopt what is essentially a proportional system, integrated by a 5% election threshold, and by the election of part of the representatives based on single-candidate constituencies. The reform could be approved swiftly (there is talk of 7 July as the approval date), so as to immediately call early elections, which could be held between the end of September and October. The news generated some unease on the markets, with some tensions emerging on the risk premium required on Italian borrowing. However, to date the widening has been modest, by around 18bps, and has only reabsorbed in part the narrowing which followed the French presidential elections. But what are the implications of recent developments? Should we worry? In essence, there are two main changes compared to the previous baseline scenario: first of all, the date of the elections could be brought forward by a few months, from March-May 2018 to September-October 2017; secondly, the electoral system which is taking shape should result in a stronger concentration of the vote to the advantage of the major parties, but forsakes any majority bonus.
The calling of early elections would not affect the reform process, which was already being held back by the end-of-legislature climate, but would have implications for the budget process. Implicitly, the drafting and approval of the 2018 budget would be left to the new government and to the new parliament: any proposal made by the outgoing government before 15 October, the deadline set by the European calendar, would be seriously undermined if the vote yields a different majority from the one supporting the current government. The only alternative, hard to imagine, would be to find an agreement with the opposition on the contents of the budget. This means that the budget for 2018 will also be passed at a much later date than usual (20 days would lapse before Parliament convenes, and it could take many weeks to form a government). One corollary is that, in order to avoid a hike in VAT rates, which should come into force at the beginning of 2018 and could prove potentially disastrous for consumer spending in Q1, alternative funding would have to be found and approved (with some difficulty, given its huge size, as a budget measure), even only in part, so as to postpone the problem by a few months, until the new government takes office.
The changes to the electoral mechanism would not radically change its proportional nature. Therefore, in a system split into four main blocks (PD and Five Star Movement with 30% each, Northern League and Forza Italia with 15%), the options available to form a majority government could be very limited. The risk is therefore of a situation similar to the ones already seen in Holland and Spain in the past few months: great difficulty in forming government coalitions, with the risk of it becoming necessary to fall back on minority governments, or to hold new elections after only a short period. Would this be enough to generate the risk of higher rates “due to deteriorating confidence on the markets” as the governor of the Bank of Italy warned in his final considerations on Wednesday, 31 May? The Spanish experience has not proven so negative, to date, although it should be said that GDP growth is stronger in Spain, debt levels are much lower. However, risks are mitigated by other factors: first, foreign investors currently hold an even smaller share of Italian debt than during the 2011-12 crisis, and mostly seem to be rather light on Italian assets; second, the structure of foreign liabilities is much more robust than it was in 2011 (the exposure of banks has decreased drastically, as opposed to greater exposure of the Bank of Italy to the rest of the Eurosystem), whereas foreign assets held by residents are on a consistent uptrend; third, safeguard mechanisms are in place today, such as the ECB’s ESM and OMT programmes, which can be activated in case of need. Lastly, the umbrella provided by the ECB’s asset purchase programme will remain open at least until December 2017, and possibly even beyond that date.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.