Reminder: The first exit polls from the Italian election will hit some time around 9 AM ET, before US markets officially open.
The hope for World markets/the EU/Italian elites is that the center-left parties get enough votes to form a stable majority.
The fear is that there will be a big surge for the conservative (Berlusconi) and populist (Beppe Grillo) movements, making a government untenable, and thus risking a backsliding of Italy's reforms, causing borrowing costs to jump, and thus reigniting the European crisis. Italy is Europe's largest debt market, and the third largest in the world.
According to Goldman, it could go either way:
The hope for World markets/the EU/Italian elites is that the center-left parties get enough votes to form a stable majority.
The fear is that there will be a big surge for the conservative (Berlusconi) and populist (Beppe Grillo) movements, making a government untenable, and thus risking a backsliding of Italy's reforms, causing borrowing costs to jump, and thus reigniting the European crisis. Italy is Europe's largest debt market, and the third largest in the world.
According to Goldman, it could go either way:
On what is seen as the most likely result
– a centre-left coalition government – the 10-yr yield spread to
Germany could narrow by 50-75bp from current levels. But an outcome
deemed almost as probable – a ‘hung parliament’ – could lead to market
volatility while an agreement among parliamentary groups is sought. From
a strategy standpoint, we reiterate our constructive stance on the
direction of EMU spreads, but maintain a preference for Spain over
Italy.
If the parliament is hung, says Goldman:
An outcome seen as almost as probable,
however, is one of no clear majority resulting from the vote. In case of
a relatively strong showing by either Mr. Berlusconi or Mr. Grillo’s
movement, the coalitions headed by Mr. Bersani and Mr. Monti would not
get enough seats to control the Upper House and form a government. In
such scenario we foresee two alternatives:
- ‘Government of National Unity’: Facing the prospect of political instability and subject to international political and market pressures, President Napolitano could encourage the formation of a government of national unity on the basis of a specific and pre-agreed agenda, which would include a new electoral law. This solution would probably attract the support of moderate actors across the political spectrum and, possibly, of Mr Grillo. The resulting transitional government could be headed again by Mr. Monti, but would be highly unstable and with a short term mandate (between 1-2-years).
Markets would be very nervous until an
agreement is hammered out. Consequently, we would expect a sharp
increase in volatility during this period, with spreads widening in a
two-way flows market. As it becomes clearer that a new government would
be formed, BTPs could stabilize around current levels – i.e., wider than
implied by macro factors especially at longer maturities.
- Fresh General Elections Are Called: This is generally deemed as a much more remote outcome because it appears fruitless to call for new elections under the current electoral law. The decision rests with President Napolitano, who has the power to dissolve one or both Houses.