Preliminary results of the Italian elections point to a hung parliament scenario and issue a warning to Brussels as Eurosceptic parties gain the majority of support.
As ballots continue to be counted, the vote on Sunday reflected the political raise of two relatively new political parties: the anti-establishment Five Star Movement (M5S), which led by Luigi Di Maio had 32.3% of the vote becoming the most voted political force, and the anti-migrant and Eurosceptic League – formerly known as the Northern League – led by Matteo Salvini who took 17.6% of the votes beating his veteran rival Silvio Berlusconi – leading Forza Italia (14% of the vote), who had been seen as the winner of the right-wing coalition.
Although Five Star Movement is expected to emerge as the largest single party in Italy’s parliament with 216-236 seats, the right-wing coalition – formed by the League, former prime minister Berlusconi’s Forza Italia and the far-right Brothers of Italy – is set to win most of the seats in parliament, having won 37% of the vote and expected to get from 248 to 268 seats ( 316 seats are needed to form a majority).
The ruling centre-left led by Matteo Renzi’s Democratic Party (PD) got only 18.9% of the vote, and is expected to secure an estimated 107-127 seats in distant third place.
Following early results, the FTSE Mib index in Milan fell 1.5% in opening trade while the yield on 10-year Italian government bonds rose 6.7% basis points to 2.10%.
Amid this political uncertainty in which forming an Italian government is likely to take weeks of negotiation and coalition-building, comments from the financial industry have not been made to wait.
Adrian Hilton, head of global rates and currency at Columbia Threadneedle Investments said: “The Italian election result looks messy, but we don’t think that the chances of Italy leaving the eurozone have gone up materially.
“The arithmetic of government-formation won’t be clear until we know how the parliamentary seats will be distributed. Neither Five Star nor the centre-right (LN/FI) coalition can govern alone, but it seems likely that the future administration will feature one anti-establishment party or another. The reaction of bond markets has been fairly restrained so far; the really negative outcome for markets would be a coalition comprising both the Liga and Five Star.
Such a scenario would probably worsen relations with the European Commission, especially around fiscal targets. But we are a long way from Italy ditching the euro: both anti-establishment parties have toned down their euro-scepticism in recent months and surveys continue to show a popular majority in favour of membership of the single currency. The constitutional obstacles to a Brexit-style referendum in Italy are in any case considerable.
Most likely we’ll see a protracted period of horse trading and uncertainty while the hung parliament is resolved. At worst, Italy will be back to the polls in a few months. Despite that uncertainty, we think euro break-up risk is at its lowest for years. And in the context of solid economic growth across the eurozone, we think peripheral government bond spreads can continue to converge gently towards those of the core.”
Laurent Clavel, head of Macroeconomic Research at AXA Investment Managers (AXA IM), commented: “The Italian elections expectedly delivered a hung Parliament. With a surprisingly high turnout (75%), the Italian elections on Sunday (4 of March) seem to have provided a Parliament broadly in line with pollsters’ projections with no pre-electoral coalition reaching a majority.
“Anti-establishment parties M5S and the League (formerly Northern League) are set to post better results than expected (resp. 31 and 18.5%). They may together reach an absolute majority but such a coalition remains politically very unlikely. The coming weeks will see negotiations among the various parties. In our baseline scenario, we expect this to eventually deliver a Presidential government backed by several mainstream parties. At this stage, futures point to a muted market reaction.”
David Zahn, head of European Fixed Income at Franklin Templeton Investments commenting on his company’s positioning on European fixed income said: “While we are still optimistic on Italy’s long term fundamentals, the political trajectory of the country is a concern particularly regards the potential for a push for increased fiscal spending from the increasingly more powerful right-wing parties. We significantly reduced our weighting in Italy in our Franklin European Total Return fund ahead of the election, as we anticipated some political volatility to arise. We are in wait-and-see mode on Italy at the moment, and will likely look to see how the political situation pans out over the coming weeks before reassessing our positioning.
“Another key question for many is the anti-EU stance of The League and The Five Stars Movement and the potential impact for the wider EU project. Recently, both parties have dialled-down their anti-EU rhetoric and are unlikely to want to leave the European Union, so we do not see it as a systemic issue for the rest of the EU. This is strengthened further by the fact that Germany has finally reached a coalition agreement this weekend, and remains a strong advocate for the wider EU Project and this somewhat offsets any potential for increased anti-EU sentiment in Italy,” Zahn added referring to the impact of the elections outcome in a wider European Union.