The Italian right-wing bloc ready for electoral victory: five questions for the markets

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MILAN, 19 Sept. (Reuters) – Italy’s right-wing bloc looks set to win a majority in both houses of parliament in next Sunday’s elections, at a time when soaring energy prices and rising interest rates create challenges increasing for the heavily indebted state.

Giorgia Meloni, leader of the nationalist Brothers of Italy, is seen as the first woman to become Italy’s first female prime minister. You have said that the right-wing bloc will respect the budgetary rules of the European Union, but you have called for reforms. Read more

The absence of anti-euro rhetoric seen in the 2018 election has reassured investors, for now.

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“In the short term we are reassured, but this is the short term,” said Charles Haddad, portfolio manager of OFI Asset Management.

Here are five key questions for the markets.

1 / How will the markets react to a victory of the right?

The short-term reaction could be mitigated as a center-right victory is expected. At around 225 basis points, the gap between Italian and German 10-year bond yields remained relatively stable.

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But the pressure on bonds could increase as the focus shifts to fiscal policy in 2023. While Meloni has talked about complying with EU fiscal rules, concern about a potential confrontation could increase if right-wing parties push. to reduce taxes and increase pension spending.

And if the right gets a two-thirds majority in both houses of parliament, the constitution could be changed without a referendum. This would cause some anguish as the constitution protects issues relating to Italy’s accession to the EU.

Any new government will have little room to undo reforms or pursue “unorthodox” economic policies due to political and market constraints, Scope Ratings warned in a recent report. Read more

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2 / Could Italy’s EU funding plan be changed?

The Brothers of Italy sees room to modify the EU-backed recovery fund program in Italy to take account of the energy shock. Read more

To receive the next tranche of funds in December, Rome needs to hit 55 new targets in the second half of 2022, which a party official said should be adequate. Brussels said that only a finalization of the agreed recovery plan is possible. Read more

The party said it will not jeopardize access to the program, but changing plans could jeopardize funds, worth 19 billion euros ($ 18.93 billion) or 1% of GDP. said Rabobank economist Maartje Wijffelaars. Read more

3 / What does a new government mean for Italian debt?

Italy is one of the most indebted states in the world, with a debt share of the gross domestic product equal to 151%.

The debt-to-GDP ratio, which is expected to decline this year, could rise if payments from EU funds were not enough, hurting economic growth.

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Concern over Italy’s debt pushed 10-year bond yields to 4%. Moody’s and S&P cut the outlook for Italy’s rating after Mario Draghi stepped down as Prime Minister in July. Read more

“I hope that the first warnings we have already seen (from the rating agencies) are not an omen of something bad for the sovereign rating, because it would be a real problem for those who lead the country”, said Alessandro Tentori, CIO of AXA Investment Managers. Italy.

4 / Could the European Central Bank activate its anti-fragmentation tool?

Rising borrowing costs in highly indebted Italy are testing the ECB’s determination to contain tensions in the bond market.

Italy’s election was seen as a short-term obstacle to the ECB’s activation of its Transmission Protection Instrument (TPI), a new tool to prevent the financial burdens of weaker states from deviating too far from Germany with the best ratings through no fault of their own.

The ECB is not expected to use the TPI anytime soon, but its presence should help support Italian bonds. Read more

“We must not underestimate the ECB’s willingness to avoid fragmentation,” said Vincent Mortier, chief investment officer of the Amundi group, adding that a move in the bond spread towards 300 bps would be a “buy signal” for Italy.

5 / What will the results mean for Italian banks?

The sector is in better shape than in the 2018 election, when the anti-euro rhetoric of populist parties shocked investors.

Italian banks have a stronger capital base and are less exposed to sovereign stress than they were ten years ago. Low valuations, rising rates and reassuring EU-friendly comments from Meloni also mean that Italian lenders look attractive.

But the economic outlook will ultimately prevail and with recession risks on the rise, betting on banks is risky, analysts say.

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($ 1 = 1.0036 euros)

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Reporting by Danilo Masoni, Stefano Rebaudo, Sara Rossi and Alessia Pe in Milan, Yoruk Bahceli in Amsterdam and Dhara Ranasinghe in London, Editing by Tommy Reggiori Wilkes and Susan Fenton

Our Standards: Thomson Reuters Trust Principles.

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