“Investors will be in early on Monday to see reactions to Italy’s vote,” Marinelli expects

The political and economic turmoil of Italy in the latter half of 2011 seems distant compared to the relatively stable, Italy which we see today. However, according to Nicola Marinelli, portfolio manager at Glendevon King Asset Management, investors will be in early on Monday to watch how the market reacts.

“Following the collapse of caretaker Prime Minister Mario Monti’s governing coalition in December, this weekend’s parliamentary election is an event the Eurozone could do without,” the portfolio manager (pictured) said.

So far the markets have not reacted to the political headlines coming from the Italian elections; everything appears to be already priced in. What would really change this is a tail risk event in the election, something unexpected such as Monti faring much better than expected.

Marinelli added: “In that case we could see Italian spreads going back to 70/80 basis points over Bund.”

Another tail risk event that would shock the markets would be the success of the five-star movement, there is a good chance that this could happen. Generally people are not as willing to openly admit they will vote for parties with flamboyant leaders so in the end they do better in elections than in the polls.

According to Marinelli, what is really appealing to the Italian people but worrying for the markets is that the five-star movement want real change getting rid of the current politicians, institutions and political order.

But elections are a short term factor for the Italian economy and don’t address the fundamental structural problems; Italy needs stable, long-term and strong government.

There are three long term possibilities: Italy could enact some internal devaluation such as a 30% real salary cut although domestically this would be politically impossible. It could externally devalue its currency; again this is impossible as single nations in the Eurozone have no direct control over monetary policy.

He said: “The third possibility is for a dual adjustment partly done by southern European economies and partly by the northern European economies.”

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