Laurent Clavel, Head of Macroeconomic Research at AXA Investment Managers (AXA IM): The Italian elections expectedly delivered a hung Parliament. With a surprisingly high turnout (75%), the Italian elections on Sunday (4th of March) seem to have provided a Parliament broadly in line with pollsters’ projections with no pre-electoral coalition reaching a majority.
Anti-establishment parties M5S and the League (formerly Northern League) are set to post better results than expected (resp. 31 and 18.5%). They may together reach an absolute majority but such a coalition remains politically very unlikely. The coming weeks will see negotiations among the various parties. In our baseline scenario, we expect this to eventually deliver a Presidential government backed by several mainstream parties. At this stage, futures point to a muted market reaction.
Adrian Hilton, head of global rates and currency at Columbia Threadneedle Investments: The Italian election result looks messy, but we don’t think that the chances of Italy leaving the eurozone have gone up materially. The Five Star Movement and the Northern League have both had a very good election, while Renzi’s PD and – more surprisingly – Berlusconi’s Forza Italia have suffered.
The arithmetic of government-formation won’t be clear until we know how the parliamentary seats will be distributed. Neither Five Star nor the centre-right (LN/FI) coalition can govern alone, but it seems likely that the future administration will feature one anti-establishment party or another. The reaction of bond markets has been fairly restrained so far; the really negative outcome for markets would be a coalition comprising both the Lega and Five Star.
Such a scenario would probably worsen relations with the European Commission, especially around fiscal targets. But we are a long way from Italy ditching the euro: both anti-establishment parties have toned down their euro-scepticism in recent months and surveys continue to show a popular majority in favour of membership of the single currency. The constitutional obstacles to a Brexit-style referendum in Italy are in any case considerable.
Most likely we’ll see a protracted period of horse trading and uncertainty while the hung parliament is resolved. At worst, Italy will be back to the polls in a few months. Despite that uncertainty, we think euro break-up risk is at its lowest for years. And in the context of solid economic growth across the eurozone, we think peripheral government bond spreads can continue to converge gently towards those of the core.
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