Italy’s elections: Monti will stay, RBS predicts

The day after Pierluigi Bersani was confirmed leader of left-wing Partito Democratico, defeating Matteo Renzi in the party’s primary elections, 2013 elections remain a key risk for Italy and investors, as they threaten a lack of continuity in the implementation of the country’s reform agenda.

Italy has a multi-decade history of delegating structural reforms to technical governments and the current government headed by Mario Monti (pictured) is challenged by the implementation of a mix of austerity and structural reforms in a short period of time.

According to Alberto Gallo, head of European macro credit research at the Royal Bank of Scotland, Monti is poised to remain in his role beyond its original mandate, which expires in March.

“The reform plan is ambitious and gives Italy a chance to save itself. However, we cannot expect a technical government to restructure the country in only one year: Italy needs more time to heal itself,” Gallo said.

According to the economist, it is critical to ensure Monti’s reforms are carried through by the next government even after March 2013 elections.

“So far, Monti has not entered the running for next election, but he has said he is open to staying if he is asked to do so by the next parliament. With Monti, Italy is unlikely to need to enter an IMF program and it won’t need a bad bank like Spain,” he added.

Fragmentation means short-term volatility, but more likely return for Monti.
Increasing fragmentation in the electorate will likely lead to a blurred parliamentary majority following Italy’s next elections.

According to Gallo, this makes it more likely that the new parliament will ask Monti’s technical government to renew its term, a positive result as Monti will buy more time to continue with his reforms, enhancing competitiveness and ensuring debt sustainability in the long-run.

“However, it is in the run up to the next election, throughout the first quarter of 2013, that political risk and uncertainty can re-emerge, likely resulting in some short term volatility in spreads,” Gallo said, who noted that Italy is a low-leverage economy.

The country has a public debt problem, but its total debt is among the lowest in Europe, including household, corporate and bank debt.

“Italian households have not stretched their balance sheets as much as other countries within Europe. Italian mortgage debt is just 19% GDP – among the lowest in Europe – vs 63% in Spain and around 40% in France and Germany,” RBS said.

Similarly, banks in Italy did not grow as fast and are now 258% of GDP, vs 340% across the Eurozone and 400% in the periphery. Consequently, Italian banks are under less pressure to deleverage.

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