Italy: Technocratic government potentially led by Mario Monti to be announced immediately after the approval of 2012 Budget  
 
The Italian government decided to accelerate the approval of the 2012 budget to the end of this week. The Senate is expected to vote on Friday, with the lower chamber following, possibly on Saturday. At the end of the Parliamentary process, PM Berlusconi will resign, paving the way for a technocratic government led (possibly) by former EU commissioner Mario Monti, who's was yesterday named senator for life by President Napolitano.
 
According to a hypothesis circulated by the Italian press, Fabrizio Saccomanni, general director of Banca di Italia, could be the new Finance Minister, while Mr Nitto Paola (an MP close to Silvio Berlusconi) is likely to remain in charge of the Ministry of Justice. That said, there is speculation that Mr Giuliano Amato is also a potential candidate as PM: in that case, Mario Monti would be in charge of the Finance Ministry (a scenario which would not alter our overall positive assessment of the latest political developments, please see below).
 
While PM Berlusconi has stated a preference for an early election rather than an interim government, Italian media (LaRepubblica, Il Sole 24ore) reports he would support a technocrat government led by Mr Monti, possibly joined by a member of the current ruling government. Moreover, according to Angelino Alfano, senior MP belonging to the outgoing ruling coalition, PM Berlusconi welcomes the nomination of Mario Monti as life senator.  
 
As we had stated in a number of previous reports, a technocratic government, committed to much-needed structural reforms, could be a first step that is likely to be welcomed by EU authorities and the ECB, which may decide to renew its support of Italian debt on capital markets.
 
At this stage, it is difficult to know whether a government led by a technocratic prime minister would have the majority in Parliament. It is likely, though, that having implicitly put forward the name of Mario Monti through his nomination as life senator, President Napolitano is confident that a majority willing to support a technocratic government led by the former EU Commissioner is possible.
 
Snapshot of potential political forces' reaction to a government led by Mario Monti.
 
PDL and NL would favour early elections but the position isn't unanimous. According to IlSole24Ore some members of both parties would be ready to support Mario Monti.
Popolo e Territorio (so called "the responsible") would prefer a temporary government.
Fli: support for Mario Monti
PD: support for Mario Monti
IDV: still undecided.
UDC: support for Mario Monti
 

Market impications
 
The acceleration of the approval of the 2012 budget law, along with the recent political developments, should improve market confidence in Italy and be supportive of the upcoming auctions: today Italy will sell EUR5bn of a new 12m BOT and on Monday it will sell EUR1.5-3bn of the BTP Sep16. For next year, we estimate net positive supply of BOTs of around EUR15bn, with gross supply at EUR220bn (ie, most of the T-bills are short dated, so are being rolled numerous times on a yearly basis). With regard to bonds (BTPs, CCTs, Linkers, CTZ), the gross supply should be around EUR220bn; but with around EUR200bn maturing, the net supply should be around EUR20bn.  The key challenge for Italy is therefore not the net supply, which at around EUR35bn is minimal (2% of GDP, down from an expected EUR62bn in 2011). Rather, the challenge will be to keep investors rolling their existing exposures to Italy. While domestic investors are likely to roll their exposures, there is more uncertainty for non Italian investors, who own about 50% of the debt. Any action not to roll the debt might add to the actual net supply.


source: BarCap