The political chaos in Rome is ongoing, as its two-party coalition has come to an end.
About 14 months ago the Lega Nord (Northern League) and the anti-establishment Five Star Movement (M5S) formed a coalition to govern with Giuseppe Conte leading as independent prime minister.
Conte resigned Aug. 20 after attacking coalition partner Matteo Salvini, the leader of the League party, who had tabled a no-confidence motion against Conte.
Sergio Mattarella, Italy’s 12th president, will now hold consultations in Parliament to gauge whether a working majority exists, obviating the need for fresh elections.
Italy's presidency is a largely ceremonial role, but plays a part in steering the country through political uncertainty.
Earlier Thursday, Mattarella held talks with political leaders amid the ongoing crisis.
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BTPs Italia are the first Italian government securities indexed to the Italian inflation rate.
Capital Economics market economist Simona Gambarini said in a research note that BTPs have rallied since Conte resigned.
“Regardless of the outcome of the latest political crisis, however, we doubt that this trend will continue. Some commentators have attributed the decline in the 10-year BTP yield since Mr. Conte’s resignation to expectations that there will be a new government without Interior Minister Matteo Salvini, and no need for new elections,” the economist said.
Gambarini said the most likely outcome is a general election either this year or in early 2020.
In that case, the latest opinion polls suggest the League would win the most seats.
“We were already quite bearish on the outlook for BTPs, as we expected the stagnation of Italy’s economy to bring back concerns about debt sustainability and lead to further clashes with the EC on the budget,” she said.
A League-led government would also increase the chances of further tensions, Gambarini said. The market reaction to flare-ups in Italy has become progressively more muted, she said.
“This appears to reflect two factors: investors no longer expect that Italy’s membership of the eurozone will be called into question, and there are hopes that the ECB will relaunch QE in the coming months."
Italy is unlikely to leave the euro anytime soon, Gambarini said.
"After all, according to the latest Eurobarometer survey published in August, Italian support for the euro has actually risen since the 2018 election."
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