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Goldman Admits It Has No Idea What Happens Next In Italy

Courtesy of ZeroHedge. View original post here.

Amid chatter of rifts among the populist leaders and a technocrat premier-designate who seems incapable of moving forward, deciphering what happens next in Italy is hard – as evidenced by the early gains in Italian bonds starting to be erased.

Italy’s 2Y Yield is back at the critical 2.00% threshold once again…

Even Goldman’s crystal ball is unable to see the near future, as they explain that there are several possible ramifications of the Italian political deadlock.

One possible outcome is that Mr. Cottarelli presents President Mattarella with a list of prospective ministers, the majority of whom would likely be technocrats. If President Mattarella accepts the proposed ministers, the government would be sworn in and ask for a confidence vote in Parliament.

As we have previously discussed, in our view the government would be highly unlikely to win such a confidence vote as Lega and the Five Star Movement (5SM) have indicated they would not offer their support while Forza Italia (the political party of former PM Silvio Berlusconi) has said it also would not vote in favour of such as arrangement; at the same time some members of Partito Democratico (the centre-left party of former PM Matteo Renzi) have suggested they would abstain. Should the confidence vote fail (as we expect), a caretaker government led by Mr. Cottarelli would hold office for a short period of time until new elections take place, likely right after the summer.

A second possible outcome is that Mr. Cottarelli hands back the mandate without forming a government. In this situation new elections would be held soon, most likely at the end of July, and the government of incumbent Prime Minister Mr. Gentiloni would continue to be in office and run day to day government affairs.

A third possible outcome, as reported by local media, is that the leaders of Lega and the Five Star Movement form a coalition government with the aim of winning a confidence vote in Parliament. Should Mr. Cottarelli hand back the mandate without forming a government, the President of the Republic could consider granting a mandate to Mr. Salvini (Lega), Mr. Di Maio (Five Star Movement), or another person as indicated. In this situation a few more days would be needed to learn whether or not a government would be formed.

Against this backdrop, Goldman believes political uncertainty in Italy will remain elevated for quite some time and Italian asset prices will continue to be under pressure.

We expect investors will remain concerned about the:

(i) economic policies that Lega and the Five Star Movement could implement if they come into office,

(ii) subsequent impact on debt sustainability and ratings downgrades, and

(iii) commitment by such a coalition government to Italy’s participation in the European Union and membership of the Euro area.

Coming just day after Moody’s put Italy on creditwatch, in the event of a coalition government between Lega and the Five Star Movement, the choice of prime minister and finance minister will be key for investors to (i) assess the commitment to Italy’s participation in the European Union and membership of the Euro area, and (ii) determine the sustainability of Italian public debt.

On the latter, the Governor of the Bank of Italy, Mr. Visco, spoke extensively yesterday. While highlighting the rebound in Italy’s GDP growth and progress made in reforming some sectors of the economy, Mr. Visco argued in favour of a very prudent fiscal policy (an assessment we strongly agree with) to prevent a crisis in confidence in Italian sovereign debt and a resultant sharp slowdown in the economy.

So put another way – Goldman has no idea what happens next, and for now suggests steering clear of buying the dips in Italian assets until some level of clarity is achieved.


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