| Italian politics dominate |
| 14.11.11 12:32 | |
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Italy is setting up a technocratic government The Italian President Napolitano has named Mario Monti Prime Minister after consulting all political parties. Monti should present the list of ministers Monday 14th November and the house should already express a view on the government and the plan. According to press reports, technocrats are likely to form the core of the government. The government will be in charge of implementing the economic and fiscal reforms committed to by former Finance Minister Tremonti, as laid out in the response committed to the European Commission in a letter dated 11 November (http://www.dt.tesoro.it/en/). It will be interesting to look at the details of the reforms: we expect fiscal austerity measures including a wealth tax, pension reform measures and other measures to boost Italy's competitiveness such as labour market reforms. ...political stability will be key for delivering reforms Political parties have met one by one with President Napolitano. PD, the main opposition party, and 3rd pole are supportive of Monti, while PDL, Berlusconi's party, has said it will provide support but has made it clear it will withdraw its support at some future point. Some small parties seem in favour of Monti, but it is not yet certain they will be enough to outweigh PDL. As a result, we see a risk of early elections in the second half of 2012: indeed, as we showed in the Daily dated 10 November, the average life of technocratic governments in the nineties was around 8 months. Yet, as we discussed in Italy's sovereign sustainability fact sheet, it is essential Italy pursues efforts reform for several years to bring its debt to GDP ratio down. Can the IMF, EU and ECB do more for Italy? Prior to the change of government, in the wake of the G20 Italy had agreed to a quarterly monitoring of its reforms by an IMF/EU team. An IMF team was sent to Italy the week of the 7th November. Such a process could be seen as the first step for Italy to benefit from the IMF or EU precautionary credit line, which allows access to IMF credit for countries with good fundamentals but temporary vulnerabilities. Italy's funding needs are high however, at around €250bn for 2012, and it would stretch IMF and EU available funds should Italy require the use of these funds. Against this backdrop, an IMF precautionary credit line could send a signal to markets that Italy's fundamentals are good and reforms proceeding according to the plan agreed with EU authorities. As a result, it is hoped yields could come off sufficiently for Italy's to implement reforms while accessing capital markets. However, we believe PM Monti will try to restore confidence in Italy's debt before accepting any IMF/EU support. Under these circumstances, we would not expect the ECB to proceed to purchases of Italy's sovereign bonds on a large scale. If Italy's access to capital markets was to deteriorate in spite of Italy implementing the agreed reforms in a timely manner, the ECB might be able to support the Italian bond secondary market however. source: Bank of America ML |
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