Saturday June 15, 2024

Investors view Italy’s future government with cautious concern

September 27, 2022

Rome: Investors oscillated between concern and caution Monday after the victory of far-right leader Giorgia Meloni in general elections in Italy, whose instability has long worried the markets.

The Milan index was up 0.86 percent in mid-afternoon trading, the best performance among European stocks, but Italy´s ten-year borrowing rate rose to 4.52 percent, the highest since October 2013.

Reflecting investors´ lingering concerns over the country´s huge debt, the closely watched spread -- the gap between Germany´s ten-year borrowing rate and that of Italy -- increased by 6.65 percent to 235 points.

However, "the rise of the spread is moderate. There will be some sort of wait and see approach, markets want to know what Meloni has on her mind before they react", Nicola Nobile of Oxford Economics told AFP.

"Markets work on the assumption that she will continue with the status quo... But if she goes crazy about fiscal measures, markets will react very strongly." By comparison, shortly after former European Central Bank chief Mario Draghi took over as Italian prime minister in February 2021, the spread fell below 100 points for the first time since 2015.

The victory of the far-right in Sunday´s elections was widely anticipated, although there was a question over the scale of her win. Partial results put Meloni´s Brothers of Italy, which has neo-fascist roots, at about 26 percent of the vote. With her coalition allies, Matteo Salvini´s far-right League and former premier Silvio Berlusconi´s Forza Italia, she will have a majority in both houses of parliament.

This convincing win "could deliver some political stability in a country that so often lacks it", noted Craig Erlam, analyst at d´Oanda, commenting on the positive performance of the Milan stocks.

However, the path of the future Italian government appears strewn with pitfalls and without much room for manouevre. Meloni´s first challenge will be to manage the crisis sparked by the soaring cost of energy linked to the war in Ukraine, while Italy is already weighed down by debt of 150 percent of GDP -- the highest ratio in the eurozone behind Greece.

But the Eurosceptic populist must also decide whether to continue or adapt reforms agreed with Brussels in return for Italy´s share of the EU´s post-pandemic recovery fund, worth almost 200 billion euros by 2026.

"The biggest concern for investors regarding Meloni is whether the new far-right Italian government would deviate from the reforms that Draghi put in place, which actually helped Italy get the EU on its side," said Ipek Ozkardeskaya at Swissquote bank.

"Draghi knew well how to dance with the rest of Europe. The same is not true for Meloni," she said. In her first comments after the vote, Meloni said she would govern for "all Italians" -- reassuring words at the end of a campaign where she has also sought to downplay her radical side.

"During the electoral campaign, Giorgia Meloni sent reassuring messages on fiscal policy and Italy´s relationship with the EU," UniCredit analysts said in a comment. "But investors will now need some time to assess whether she intends to stick to these promises."

Italian investment bank Equita expects a limited rise in the spread in the coming weeks, to around 230 to 250 points, "unless there is a change of tone" from Meloni´s coalition. The stronger relative position of her Brothers of Italy party compared to Salvini´s League suggests she will take a "probably less aggressive" policy approach, it added. During the election campaign, Meloni distanced herself from the budget-busting demands of the League to help households and businesses with energy costs.