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Italian election: populist surge puts investors on edge

Rise of populist parties in Italian elections unnerves investors who fear jump in government spending.

Italian election: populist surge puts investors on edge

The success of populist parties in Italy's elections has unnerved investors, amid fears voters' move towards the fringes of the political spectrum is likely to spark a jump in government spending.

Italy's FTSE MIB index fell 1.2% on the result, while Italian banking stocks dropped 2.8%. Yields on 10-year Italian government debt jumped from 2.04% to 2.1%.

The anti-establishment Five Star Movement emerged as the largest single party, but its vote share would trail a coalition of the right wing League, Forza Italia and Brothers of Italy parties. The Democratic Party was the second largest, but its left-wing coalition of parties lagged the vote share for both Five Star and the right.

'A coalition was considered a good outcome but the market preference was for one mainly involving the traditional parties,' said Claudio Ferrarese, fund manager at Fidelity International.

'Now, however, it looks increasingly unlikely that populist parties, and Five Star in particular, can be left out of a broad coalition given the election result. Going forward the exact market reaction would depend on how diluted Five Star would be in such a coalition.'

Ian Ormiston, manager of the Old Mutual Europe (ex UK) Smaller Companies fund, said the jump in Italian government bond yields on the result was 'large but nothing exceptional'.

'Equity markets and companies in Italy are used to turmoil so it is unlikely that much changes as a result of the election and the upcoming uncertainty,' he said.

Schroders senior European economist Azad Zangana said it was not clear who would lead a right-wing coalition as former prime minister Silvio Berlusconi – former leader of the Forza Italia party – was still banned from front-line politics.

Zangana said a government led by the League – which has transformed from a separatist regional party to a far-right, anti-immigration, eurosceptic party – would ‘concern many’ as its coalition would also include hard-right nationalist party Brothers of Italy.

If a coalition fails to be formed, then president Sergio Mattarella can call for a grand coalition, with one of the party leaders becoming prime minister, or a ‘technocrat’ being in power. If this option fails, a fresh election would be necessary.

Zangana (pictured) said the size of the Italian economy meant the election results were ‘very important for international investors’ who may dump Italian government bonds, causing yields to rise sharply on its ‘huge mountain of government debt’, which sits at €2.2 trillion (£2 trillion) or 133% of GDP.

He was not concerned that the success of anti-EU parties would spark an Italian exit from the EU as Italy’s constitution does not allow for a referendum on the issue, but said the risk instead lay in the plans for increased spending.

‘The bigger risk is fiscal slippage, and possibly the rolling back of important reforms from recent years,’ said Zangana.

‘This would put Italy on a collision course with the EC, and may even awaken the dormant bond vigilantes.’

The European Central Bank’s (ECB) bond buying programme was likely to keep markets calm for now but Italy would become ‘more vulnerable’ when the central bank reins in quantitative easing (QE) at the end of the year, he added.

David Zahn, head of European fixed income at Franklin Templeton, said ‘clearly the market is trying to price in the fact that things could get shaken up a bit more in Italy as these fringe parties gain more ground’.

He predicted that ‘increased uncertainty’ would lead to ‘bouts of volatility in Italian bonds over the coming weeks’.

‘While we are still optimistic on Italy’s long-term fundamentals, the political trajectory of the country is a concern, particularly regards the potential push for increase fiscal spending from the increasingly more powerful right-wing parties,’ he said.

Jane Foley, head of foreign exchange strategy at Rabobank, said there could be still be negative implications for the eurozone as ‘at the very least, the political environment suggests that the progress of any structural reform in Italy will be difficult’.

She said the central role of Five Star would ‘cast a shadow on the plans of France’s president Emmanuel Macron for further eurozone integration’. 

12 comments so far. Why not have your say?


Mar 05, 2018 at 18:00

The Italian populist uprising should surprise no-one. They've borne the brunt of economic migration from North Africa, and they've had enough. The rising tide of hostility towards the dictates from Brussels bears comparison to our own reasons for leaving the EU..

I get the distinct feeling the EU is beginning to fragment even before we've come close to securing a "deal" for leaving. With 28 countries all with very different cultures and economies, rising tensions are hardly surprising.

What started out as a "Common Market": purely a trading arrangement between several western European countries, has now become a politicised, ungovernable "gravy train", where allegedly, the accounts are never audited.

Italy appears to have fared amongst the worst on the economic front, rising unemployment, and a bankrupt banking system, reportedly only kept afloat until recently through regular "quantitative easing" from the European Central Bank.

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nigel morris

Mar 05, 2018 at 18:57

hopefuly this strengthens our position on leaving the eu and the eventual collapse of the eu

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Mar 05, 2018 at 19:22

And there was Guy Verhofstadt telling us the populist wave was over!

I suspect Italy, if it does form a hard right government, will become the next bad boy in the EU joining Poland etc ... and being a relatively large country and Eurozone member is in a position to cause some real problems.

If this trend continues, the European Parliament elections in May 2019 could be interesting & could contribute to making the EU increasingly dysfunctional if the populists do well there to.

It's time for the EU to start thinking about doing fewer things and doing them well, because the current road of travel of ever closer union is looking increasingly unsustainable.

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Mar 05, 2018 at 22:06

Brexiteers clutching at straws again, this time with Italian election.

Meanwhile Brexit is going more shaped by the day, latest suggestion is US/Canada border for Ireland. Preposterous suggestion.

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Mar 06, 2018 at 10:15

Hardly "clutching at straws" Spartacus. More a case of reflecting the growing reality of unhappy EU member countries.

As for the Irish border. As a substantial amount of their trade is with the UK, they might, in time consider they 'd be better off coming in with us than continuing to pay homage to the unelected gnomes of Brussels.

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William Phillips

Mar 06, 2018 at 11:22

M5S is not a political 'party'.

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Mar 06, 2018 at 18:04

#anglo29 - suggestion that Ireland will be dumb enough to go down same route as Britain is frankly laughable

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Mar 06, 2018 at 18:59

#Spartacus. What may seem "laughable" now, could be very different in a few years time. The UK and Italy are far from being the only ones disillusioned with the rigid Brussels regime.

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Mar 06, 2018 at 19:13

Given the populist tide sweeping Europe at the moment, which looks like it has further to run, it would be stupid and delusional to not contemplate the possibility that other countries could leave the EU or that it could break-up.

Even some European politicians, analysts, fund managers think it is possible.

The key issue is whether the EU can reinvent itself to adapt to the changing demands and needs of European citizens who increasingly seem to want more power repatriated to the nation state rather than ever closer union.

Still some prefer the ostrich strategy and being blind to reality & frankly that's their problem.

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Mar 06, 2018 at 20:51

#Novgorod.....Talking of being blind to reality, I wonder why we don't hear more about the massive fraud and corruption reportedly going on within the EU, but rarely making the headlines. Reuters news agency have reported many millions of Euros gone "missing" in procurement scams etc., in various Eastern European countries.

I also recall a lady accountant revealing millions more "missing" from EU coffers some years ago, Her reward for "whistle-blowing" was firstly suspension from her position, then the sack. And the person heading up the secret meeting to get rid of her?....None other than a prominent failed former UK Labour politician presumably enjoying his time on the EU Gravy Train.

Little wonder the EU is not too keen on having its books properly audited. Remember we are talking about tax payers EU contributions here.

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Mar 06, 2018 at 21:20

In fairness to the European Commission those funds are distributed to member states by the Commission for specific purposes such subsidising farmers or regional development and as you say much of it then disappears through corruption as many EU countries are spectacularly corrupt.

EU corruption stories used to appear in the press regularly in the 80s and 90s, but I think they've been superseded by the never ended series of EU / Euro-crises that now occur routinely whether it be populist parties gaining in the polls, countries and banks going bust, east European countries rebelling, uncontrolled immigration, north / south divides over austerity etc ... in other words it all makes for much more dramatic headlines than corruption.

Indeed, the EU / EZ increasingly feels like just one crisis away from implosion and if it is not addressed soon, it will fail. And if that happens the rout in global stock markets will be spectacular as many of Europe's banks will fail creating a systemic domino effect across the world,

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Mar 07, 2018 at 11:22

That is what I fear, the domino effect. There seems to be no desire on the part of the EU to root out systemic corruption & fraud. It just gets swept under the carpet, and on the odd occasion when someone within Brussels does expose what's going on, they get hounded out of office, the "herd instinct" dominates.

Uncontrolled immigration has been a major factor in the current crisis, both for Italy and the UK.. It was sheer stupidity of Merkel to announce that Europe could take a million "refugees". This was the signal for every wannabe economic migrant to chance their luck, from Afghanistan to Algeria and every third world country in between. Yet France has the nerve to blame us for the build up of the "Calais Camp".

No-one doubts we need a certain amount of controlled immigration from skilled workers who can contribute to this country, but to have an "open door" policy to all and sundry (part of the conditions for our continued membership of the EU) is a complete no no. Apart from the unsustainable rise in population growth, it is also freedom for the terrorist to cross borders without challenge, something Brussels has learned to its cost, but still chooses to look the other way.

If the EU had not chosen to politicise the old Common Market (which was purely a trading arrangement), or introduce the Euro, which was only going to benefit the wealthier members, then I don't believe it would be in the mess it is today, and we would have been content to stay in.

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