In this factbook, we provide an update to Significant Challenges for Italy - All you need to know about key issues , 14 August 2017, and take stock of the developments on the political front, banking sector problems and debt outlook.
Politics: The Italian political landscape remains fragmented and uncertainty about the future government composition is high. No clear majority is in sight and the new 1Rosatellum voting system adds to the uncertainty. We think the most likely election outcome will be a grand coalition between Forza Italia and the Democratic Party, although negotiations might drag on well into H2 18 and the risk of new elections remains non-negligible. We assess the risk of a Eurosceptic government as very small and even in this case expect ITExit discussions not to be a first priority. Irrespective of its composition, we do not expect the new government to undertake the necessary structural reforms to kick-start the Italian economy, meaning that Italy will remain the 1weakest link in the eurozone.
Fixed income: There has been strong demand for Italian debt since the repricing in December and early January. Italy is still supported by the ECBs QE and the significant carry and, so far, investors do not seem to be worried about either the political uncertainty or that the ECB will end QE in 2018.
FX: EUR/USD in our view currently incorporates only a minimal political risk premium. As we do not see the Italian election as a big event risk for EUR spot rates, it adds to our view that any dips in EUR/USD will be shallow and short-lived.