Veritas – Political risk keeps investors away from Italy

Portfolio managers tend to agree. Unlike Spain, Italy runs a primary budget surplus, its banks are healthier, and its industrial sector relies on successful small and medium sized companies managed by talented entrepreneurs.

Yet, the country features a strong risk for investors: its politics. Otherwise expressed as the uncertainty of the outcome of the next political elections, coming up sometime soon between autumn 2012 and May 2013.

Technocrat prime minister Mario Monti already said he intends to leave his post in 2013, at the end of his temporary mandate.

Monti was appointed prime minister by president Giorgio Napolitano, taking the post from Silvio Berlusconi.

His task was ambitious: to insulate the country from the eurozone crisis contagion from neighbouring Greece, while giving fresh credibility to the Italian political class at European level.

So far, his work has been generally considered a success on both sides.

Monti’s government has been tackling with commitment some of the thorniest issues of the Italian economy: the reform of the costly system of local administrations ‘province’; article 18 of the workers’ statute; and the unsustainable cost of the pension system.

Monti and his team also raised taxes and cut public spending, bringing fiscal policy under control.

Moreover, Monti put strong efforts in tackling tax evasion in the country, sending inspectors in most exclusive holiday destinations such as Cortina d’Ampezzo.

“The government wants to be sure that, when its task is complete, it leaves an Italy that is less in a state of emergency, with muscles that are better trained for economic, social and civic growth,” he said during a recent interview.

Meanwhile, Monti recently urged Italy’s political parties to agree on a new electoral law which would ensure the stability of the new government that will be elected over the next months.

The current law, adopted in 2005, doesn’t allow voters to choose a single representative, forcing them to pick a list of candidates.

While a clear name has not emerged yet from the left wing party Partito Democratico, Silvio Berlusconi, who left the office in November with political favour at its lowest level of his decade long career, already stated he is working on a comeback in full style.

At 75, the three-time prime minister recently said he is ready to run for the candidacy of his centre-right People of Freedom Party.

Despite a recent poll by Termometro Politico which showed that 72% would never vote for Berlusconi again, and a very likely opposition to the candidacy from Monti himself, the memory of voters on the pre-Monti condition of Italy’s financial system could prove to be short-lived.

And a new government run by Berlusconi would represent, according to portfolio managers, the greatest risk of investing in Italian assets.

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