SNAP ANALYSIS: Italy's Centre-Right coalition comfortably takes power as expected, draft Budget Bill deadline & Moody's loom

Analysis details (07:25)

• As expected, the Centre-Right coalition led by Brothers of Italy’s (FdI) Giorgia Meloni has emerged as the clear victor of the September elections, securing around 44% of the vote in both the Senate and House compared to the Centre Left’s ~26%; note, counting is ongoing, though the vast majority has concluded.


• Importantly, this result implies according to ANSA that the Centre-Right coalition will take at least 114/200 seats in the reduced Senate. Therefore, assuming the coalition remains intact, it is on course for autonomous governance. However, the result does leave them shy of the two-thirds majority required to make alterations to the constitution without first calling a referendum.


• The breakdown of the Centre-Right’s 44% of support has FdI with around 26% both League and Forza Italia with just over 8%. On the flip side, the Democratic Party (PD) secured around 19% of the vote as a member of the Centre-Left coalition and will function as the main opposition party after conceding defeat. For reference, ANSA reports turnout at 63.9% which is the lowest ever recorded and 9pp shy of the 2018 election.


• While FdI’s Meloni is expected to be the next Prime Minister, this is not a certainty. As, while her party came out as the most dominant by far across the political spectrum, shy is still reliant on Forza Italia and Brothers of Italy, run by Salvini and Berlusconi respectively. Going into the election, the agreement was that the leader of whichever party within the coalition had the best result would become PM, however, this agreement is by no means a guarantee; thus, 11th hour turmoil remains a possibility.


• Reaction has been fairly limited thus far, given the result is very much as expected, with the EUR downbeat at present but relatively in-fitting with peers (ex-GBP) in terms of being modestly pressured against a firmer USD that has seen the DXY lift to a fresh YTD peak. Within fixed income, BTPs have opened under modest pressure and the BTP-Bund yield spread has widened incrementally to around 235bp – however, these moves are well within recent ranges and are in-fitting with broader market action this morning.


• In terms of the next steps, the draft deadline for the Budget Bill is September 27th and thus will likely be the immediate focal point of the new coalition’s efforts, further out on Friday, September 30th Italy’s sovereign debt rating will be reviewed by Moody’s who currently have the nation at Baa3↓, Negative. Domestically, we look for any hints that Meloni’s gov’t is going to stick to its pledge to adhere to EU budget rules and the Recovery & Resilience Plan – a pledge made during the campaign that quelled much of the concern around the potential Centre-Right governance; first indications of adherence/deviation to this may be seen within the draft Budget Bill. Elsewhere, any commentary from ECB officials, particularly Panetta and Visco will be closely watched given their domestic bias, alongside anything from Schnabel given her role as head of purchases, for any hints that TPI may be required. Though, as things stand, BTP-Bund is well within recent parameters.

26 Sep 2022 - 07:25- Research Sheet- Source: Newsquawk