Will Italy Still Have ECB Support In Wake Of Elections?



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David Zahn

Hello. I’m David Zahn, and this is your European fixed income update. So, we’ve had the elections in Italy, which have shown that the far right has actually done very well and will hold a sizable majority in both houses, which has real ramifications for Italy. This means they can make constitutional change without having to have other parties involved. I do think that’s unlikely at the moment, but that could be in the future.

Also, markets, I think, have reacted as one would expect, with some spread widening because one of the big things that we don’t know about is how will this new government, once the prime minister is appointed, deal with the EU [European Union]? Will they be conciliatory as they have been in the runup to the election, or will it become a little bit more boisterous and say, we want to do more spending, we want to do it, we have fiscal plans we want to do, and you’ll have to accommodate that.

If that was to happen, we will have more spread widening in Italy. And the real question is, will the ECB [European Central Bank] continue to support the Italian government bond market if the government is at odds with the EU? I think they will, because otherwise it would precipitate a sovereign crisis in Europe. But this is going to create volatility for at least the next four to six weeks, probably two months, while we see the Italian government set out its new cabinet and determine who is actually to be running, what are the policies of this new government going to be, now that they’ve had this victory at the polls.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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