ANALYSIS: The Italian Presidential election (voting to start at 14:00GMT) - Draghi to switch roles?

BACKGROUND: January 24th will see the commencement of the process to elect the replacement for President Mattarella. The process involves 1,008 electors from the Senate and Chamber of Deputies casting votes via a series of secret ballots across various voting rounds. The first three rounds of voting require a two-thirds majority to be elected President, as of the fourth round, an absolute majority is required. Given the array of factions within Italian politics, it can take many voting rounds until a victor is declared. UBS makes the point that of the electors, “both centre-left and centre-right coalitions have about 400 votes each, with a slight advantage for the centre-right. Hence, both are short of an absolute majority, and therefore an agreement will be needed.” Note, the role of President is largely seen as “ceremonial”, but has the ability to dissolve parliament, appoint the PM and Cabinet as well as rejecting laws on a constitutional basis.

DRAGHI: Current PM Draghi has been touted to take over as President after running a technocratic government since February 2021. During his tenure as PM, by using his credentials as the former head of the ECB, Draghi brought a sense of economic and political stability and therefore the transition to the "ceremonial" role of President would be of note. Politico stresses this point by highlighting that Draghi is currently in charge of managing Italy's EUR 200bln portion of the EU Recovery Fund and therefore any potential replacement would hold a large sway over the domestic economy and ultimately the Eurozone given that Italy's share of the Fund amounts to around 25%.

OTHER CANDIDATES: In terms of who else is in the running for the position, it is worth noting that given the secret nature of the ballot, some lawmakers will refrain from revealing their preferred candidate. On January 14th, centre-right parties confirmed that they were to back former PM Berlusconi as President and will seek parliamentary support for his backing. Political commentators had noted that such a Presidency could jeopardise the current air of stability surrounding Italy given his flamboyancy and previous involvement in various corruption and sex scandals. Over the weekend, Berlusconi withdrew his bid to become President and therefore has dampened some of the political risk surrounding the event. As it stands, the centre-left are yet to provide much in the way of clues over who they will back. In terms of other potential candidates, The Week highlights former Christian Democrat President of the Chamber of Deputies Pier Ferdinando Casini, European Commissioner for the Economy Paolo Gentiloni and former PM Giuliano Amato. It is also worth noting that some lawmakers wish for current President Mattarella to remain in his position, however, for now he appears to be sticking with his plans to retire at the age of 80.

IF DRAGHI IS ELECTED AS PRESIDENT: If Draghi is elected as President, this will mean that the position of PM will be vacant. The first avenue to be explored will be whether or not the legislature can agree to support the existing government coalition until the currently scheduled 2023 elections. If an agreement is informed, this could provide some reassurance to the marketplace, depending on how divisive his replacement is and whether or not they will continue with the implementation of  the Recovery and Resilience Plan (PNRR). Furthermore, UBS argues that Draghi could still offer some air of stability in his role as President, however, this may not be evident in the immediate aftermath of the election. Furthermore, it is worth noting that being elected as President will extend Draghi’s political shelf-life. Conversely, in the absence of an agreed replacement, an early election could take place with the date brought forward from 2023. However, one mitigating factor here is that it would see the total number of MPs lowered to 600 from 945 and therefore there may be some reticence from lawmakers to trigger such an event

IF DRAGHI IS NOT ELECTED AS PRESIDENT: If he is not appointed as President, Draghi will likely remain in his position as PM and therefore could continue on his current path of implementing the PNRR. Such a course of action is favoured by League leader Salvini who, over the weekend, suggested that "it would be dangerous to remove Draghi now". However, it is likely that Draghi would exit Italian politics following the 2023 elections and therefore any air of stability could prove to be short-lived. With regards to the new President, the focus for the market will be on the “divisiveness” of him/her. Whereby, the more divisive the character, the more risk there is that unity within the legislature breaks down and impairs reform/PNRR progress, whilst also potentially jeopardising Italy’s presence on the international stage. It is worth noting that if Mattarella agreed to be elected for a second-term, this would see a resumption of the current status quo. However, there have been no signs as of yet that Mattarella is looking to cancel his retirement plans.

MARKET REACTION: ING have provided a useful crib sheet providing a scenario analysis of the event with potential market reactions to each possible outcome

24 Jan 2022 - 08:37- Fixed IncomeEconomic Commentary- Source: Newsquawk