Political stalemate in Italy and the impact on markets

Italy’s parliament reconvenes

Italy’s parliament convened for the first time on Friday since the national elections to vote for speakers of both the Senate and the lower house. The anti-establishment Five Star Movement joined forces with right-wing parties to elect Five Star’s Roberto Fico as president of the lower house and Elisabetta Casellati, from Forza Italia, as Senate president.

There is speculation that this tie-up could provide clues into the potential outcome of government coalition negotiations, after the national vote led to a hung parliament earlier this month. Currently, the government is in a stalemate. On 4 March, the anti-establishment Five Star Movement, led by Luigi Di Maio, became the largest single party. However, a coalition of four right-wing parties, including former prime minister Silvio Berlusconi’s Forza Italia and La Lega, led by Matteo Salvini, came out on top.

Potential government outcomes

One potential outcome of coalition negotiations would be if the Five Star Movement joins forces with La Lega. While technically they come from distinctly different ends of the political spectrum, they have many views in common. Both parties are anti-immigration, albeit La Lega having much stronger views on this. The two parties both want to enact pension reforms, and they have both expressed anti-European Union feelings in the past, although the Five Star Movement softened on this view along the campaign trail. IG analyst, Filippo Diodovich, says these two parties have ‘a very similar agenda’ and they want to avoid fresh elections, so the chances of this coalition are increasing. Diodovich says this outcome would be very negative for the markets, particularly the banks.

Another potential outcome would be if Italy’s President, Sergio Mattarella, steps up in April to help form an interim technocrat government. Diodovich explains this outcome would be the base-case scenario for markets. If the Five Star Movement and La Lega form a coalition before then, Mattarella has no power to intervene. Another outcome would be if Italy ends up waiting until autumn to hold fresh elections.

Impact on markets

Italian markets have become desensitised to the political volatility. Speaking before Friday’s vote, Diodovich said that if the lower house vote indicates that the Five Star Movement is likely to form a coalition government with La Lega, that could lead to some sharply negative moves in Italian markets, particularly in the banking sector. He says it could also lead to volatility in the Italian bond market with yields rising. On Monday, the FTSE MIB opened lower, underperforming the wider move higher in European equities outside of Italy.