Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

Italian political and market uncertainty unlikely to end soon, says Scope Ratings

Political uncertainty in Italy is roiling financial markets. Scope Ratings explains why political and market uncertainty is unlikely to end soon.

In the midst of Italian market turmoil, Scope’s Dr Giacomo Barisone and Dennis Shen answer three of the most pressing questions investors are asking.

Can unsettled Italian markets find a more stable footing?

A period of higher volatility will probably persist at least in the near term. It’s important to note that there appears to be a new paradigm in Italian politics – with the greater presence of eurosceptic, populist groups looking as if it’s here to stay, rather than proving to be a passing phenomenon. This ensures a degree of uncertainty relating to possible tensions between a future Italian government with the nation’s Constitution and Europe, the possibility of repeat elections, and potential market-unfriendly policies. For instance, in the scenario of repeat elections, the right-wing Lega stands in a good position to strengthen its parliamentary footing, with around 25% of voting intentions in the latest polls, up from 17.4% in the March elections.

Scope spoke of the risk of a ‘meaningful repricing’ in Italian markets in its February comment before the March election. Italy’s 10-year yield spread to Bunds stands at about 260 bps on Wednesday, after lows of 114 bps only a month back. However, Scope notes that Italy holds a relatively long average government debt maturity of 6.9 years. Alongside a primary surplus, this should help mitigate the pace of the impact of present higher government yields on debt sustainability for the moment.

It remains to be seen whether stability might return to Italian markets without more direct action from policymakers, including via alternative solutions in domestic politics or verbal intervention from the European Central Bank (ECB). There’s been discussion in the financial community around Outright Monetary Transactions (OMT), in which the ECB might intervene in Italian sovereign markets; however, Scope notes that the activation of OMT requires a government to apply to the euro area’s bailout facility with its associated conditions – a prospect still far off for Italy.

Given heavily divided opinions on Italy’s status in the euro, is there risk of an ‘Ital-exit’?

While Lega and the Five Star Movement (M5S) have somewhat facilitated renewed conversations around euro exit with their stance against the EU and market forces, Scope believes the possibility of a euro exit event itself is exaggerated, as it was during the debt crisis. Despite the return of talk about Ital-exit, Scope maintains its view outlined in its February comment (linked above) that a successful exit from the euro is unlikely.

Even in the case in which a populist, eurosceptic government were to come into power, rhetoric (or actions) centred on a euro or EU exit or a parallel currency falters once the significant economic, financial and political cost and complications around such an exit strategy become clear. The lessons learned in the Greek crisis of 2015 and those still being learned in the UK’s planned exit from the EU should not be so easily forgotten and discounted. In addition, holding an exit referendum in Italy requires a complicated legislative process, with a constitutional amendment (requiring two votes at a two-thirds majority in each house of parliament, or failing that, a preliminary referendum to facilitate a euro referendum) needed before a referendum on the euro could be held.

What are the implications of current uncertainty and risks for Italy’s ratings?

Scope is monitoring closely the current political and market dynamics, alongside the implications of the Italian crisis vis-à-vis other sovereign markets. We rate the Italian sovereign at a ‘A-’ rating with a ‘Stable’ Outlook. However, we’ve highlighted in the past that political and policy uncertainties and the potentially limited scope that a new Italian government implements the needed economic reforms to tackle Italy’s outsized debt stock (of 132% of GDP) raise questions on the sovereign’s outlook and rating trajectory. Scope is due to update its rating view on Italy by 8 June 2018.

Please click here for Scope’s latest rating announcement on Italy, dated 30 June 2017.