Italy: Two Super Marios Could Take Italy To The Next Level

Berlusconi kept his word and stepped down on Saturday evening after the austerity package had been passed in the lower house. President Napolitano announced on Sunday night that Senator Monti (the former EU commissioner) had been asked to form and lead a so-called “technocrat” unity government. The new government could be presented as soon as today and is set to be endorsed by the parliament later this week. This is an ideal solution from a market point of view. The move was welcomed by Presidents Van Rompuy and Barroso who wrote in a joint statement “We believe that it sends a further encouraging signal...of the Italian authorities' determination to overcome the current crisis.”

ECB likely to reward Italy by stepping up the SMP buying
It is likely that the ECB will step up its buying on Monday, as Italy has now delivered on its promises. We saw a similar move in August when Italy was included in the Securities Markets Programme (SMP). Back then Tremonti and Berlusconi managed to agree on front-loading austerity measures aimed at a balanced budget in 2013 (from 2014 previously). At that time, the ECB was successful in pushing 10-year yields from close to 6.5% to under 5%. The purchases were significant in the first seven-day period (EUR22.5bn). However, this time it is likely that the purchases would have to be even bigger, say EUR30bn-plus in the first seven-day period. It is essential that the ECB sends a clear signal that it is committed, as it will be tested by the market repeatedly. In August, the ECB signalled this by releasing a statement where it welcomed the announcement from Italy. There has been no clear signal from the ECB this time. However, the two Marios met on Sunday morning according to Bloomberg. Italy will tap the market today in a 5Y BTP auction.
   
Italy’s future lies in the hands of the two Super Marios. Mario Draghi and the ECB can help Italy for some time by pushing yields down. However, the ECB has on various occasions underlined that the SMP purchases are only temporary. It is up to Mario Monti to go ahead with the implementation of the austerity package as well as growth boosting structural reforms. Combined with quarterly IMF reviews it is hoped this can help Italy re-establish market confidence. The risk is that many market participants have lost faith in Italy, something Italy needs in 2012, when it will have to tap the market for EUR300-350bn.