Italy: Political situation is far from clear - BBH

Research Team at BBH, notes that the Italy's political situation is far from clear and a new government will be formed, and it still looks possible that Renzi, the head of the largest party, is a likely candidate. 

Key Quotes

“The state of the election law is problematic.  The Constitutional Court will not review the electoral reforms for the lower chamber until January 24.  There is no electoral law for the upper house.  And there is no returning to the previous law, which was ruled unconstitutional.”

“Many are still talking about the referendum results as being anti-establishment.  Some observers seem to think the Five Star Movement will be swept into power and call for an immediate referendum on EMU membership.  Leave aside the fact that polls consistently show that the vast majority of Italians want the euro instead of a new lira; the Constitutional Court has ruled out referendums on international treaties.”

“Late yesterday, Moody's cut the outlook on Italy's credit rating to negative from stable.  It is a Baa2 credit, according to Moody's, which is two notches into investment grade.  S&P has it lower at BBB- and Fitch has it a step higher at BBB+.  A one step cut by Moody's would have little consequence.”

“DBRS is the one to watch.  It gives Italy an A rating.  It is under review, which after postponing for the referendum, the agency will make a decision by early February.  It previously was most concerned about growth but recognizes that recent developments are credit negative.  The DBRS rating is important because the most optimistic rating agency is the one the ECB pays the most attention to in setting the haircut on collateral.  If DBRS cuts Italy's rating, the haircut will be larger.”

“The Financial Times lead story is that Italy has requested more time for Monte Paschi to complete its capital raising exercise, arguing that the referendum complicated matters.  Meanwhile, Italian bank shares are gaining for the third session.  It is up nearly 2% after yesterday's almost 4.5% advance and Tuesday's nearly 9% charge.  Italy's 10-year sovereign bond is underperforming with a six bp rise in yields.  However, on two-year money, Italy is outperforming the core and other periphery countries today.”