Schroders: Likelihood of a Monti encore reduced by Berlusconi comeback

Politics in Rome has never been easy, but the ancient city is set to see another battle unfold over the coming months following the decision by Italy’s technocrat prime minister Mario Monti to resign once parliament will have passed the 2013 budget, warned Azad Zangana, European Economist at Schroders.

“Monti was always expected to make way for democratic elections in 2013, but the timing of his announcement is about two months earlier than expected. Investors had hoped that Monti would return to office after the election, due to the ongoing need for the implementation of tough, unpopular reforms, however, it seems that political divisions have sharply reduced the likelihood of a Monti encore,” Zangana said.

The 2013 budget is expected to be voted into law by the end of the year, making an election in February likely.

In this new scenario, the key question for investors will be whether austerity and structural reforms will continue once Monti has left.

The centre-left Democratic party, led by Pier Luigi Bersani, is expected to continue along the road-map Monti had laid out. This should become easier to sell as most of the hard work has been done by Monti and the 2013 budget envisages next year should be the final year of austerity.

However, Berlusconi’s party appears to be prepared to campaign on an anti-austerity ticket, raising fears in markets.

“In our view, this is a disappointing development which clearly raises the risk of an anti-austerity result from the election derailing the positive momentum peripheral markets have recently enjoyed. With about a 20 point lead in recent polls, Bersani should defeat Berlusconi in February,” the economist said.

Schroders expects to see another bout of stress in peripheral markets over the start of 2013 while uncertainty over the election continues.

However, with Italy close to running a primary budget surplus, and with an austerity-friendly party more likely to win the election than not, this may represent another buying opportunity of Italian bonds and equities.

The uncertainty will impact markets particularly given the period of stability since the summer.

“Profit taking in both fixed income and equity markets is inevitable given the rally over recent months, but we continue to believe that the ‘Draghi put’ is very much in place, the political will for euro-crisis resolution remains and, perhaps most importantly in Italy, the people want structural reform,” Schroders said.

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