Until Trump's Thursday trade war announcement, and last night's shock statement by Kuroda previewing the end of the BOJ's QE, the single biggest event risk was the Italian election this Sunday, March 4 (together with the SPD "grand coalition" referendum held concurrently in Germany whose outcome could seal Merkel's fate). And yet, ahead of the election, investors are feeling especially complacent, with no notable moves in terms of Italy-specific risk assets because, as Reuters noted, "the economy is strengthening and anti-euro sentiment is waning in the single-currency bloc" although many beg to differ. Still, the vote has the potential to throw them a curve ball. Below we comment on some of the key questions surrounding of the election. First, the basics: The Italian election takes place Sunday, March 4. Polls will be open from 06:00 GMT to 22:00 GMT. As results filter through from 22:00 GMT / 17:00 EST Sunday, the most contentious seats are considered in the south. The election will elect the 945 members of the parliament for the 18th legislature – specifically, to select the 630 members of the Camera dei Deputati (lower chamber) and 315 of the Camera del Senato (the Senate/upper house). Note that the electorate does not vote for the PM. The main parties in contention are: Forza Italia (center-right) led by former PM Silvio Berlusconi Democratic Party (center-left, PD) led by former PM Matteo Renzi 5 Star Movement (anti-establishment, M5S) led by Luigi Di Maio – seen as the most market negative outcome. What are the expectations? Reuters has put together a useful poll tracker which can be found at the following website. No single party or coalition is expected to reach a parliamentary majority thanks to the new electoral law (see below). For example, Bloomberg surveyed 15 economists on February 2-7, with 38% expecting a hung parliament, and 33% a grand coalition: What is the most likely outcome? Latest polls point to a hung parliament, where no one party or coalition has a majority to form a government. If this happens, Italian President Sergio Mattarella, will call on parties to form a broader coalition of pre-election adversaries. This could include the ruling centre-left Democratic Party and Silvio Berlusconi's Forza Italia. Analysts see a hung parliament, leading to a broad coalition that includes mainstream parties, as the most positive market outcome because it could result in political stability and policy continuity on Europe. Even in this situation, any uncertainty over the government's make-up could lead to short-term volatility. While unlikely, the most feasible coalition would be center-right (CR), given that M5S has ruled out a coalition. A CR coalition would be formed by Forza Italia, Lega Nord (the anti-south, anti-immigrant Northern League), Fratelli d'Italia (Brothers of Italy) and Noi con l'Italia (Us with Italy). All the polls show the Five Star Movement (M5S) as becoming the single largest party, winning between 27% and 29% of the vote. However risks for EUR have diminished since the party dropped its call for a referendum on the euro in mid-January. A (market positive) surprise would be an outright center-right victory. Will the winner tackle Italy's giant debt pile? Reuters here is laconic: "Probably not." Whatever Italy's next government looks like, the chances that it will push through long-term term structural reforms to improve Italy's economic performance or to tackle the country's debt pile, are low. At 132% of GDP, Italy has the European Union's worst debt ratio after Greece. In fact election pledges could worsen the situation - Bank of Italy Governor Ignazio Visco has cautioned that parties' pledges to slash taxes and hike spending could prove counterproductive since the problem of high debt "cannot be sidestepped." That could increasingly bring investors to view Italy as the euro zone's weak link, making Italian assets vulnerable at times of market uncertainty or during the withdrawal of European Central Bank stimulus. What could surprise markets? As a reminder, this is the first election to take place under a new, untested voting system introduced last year, which makes the outcome particularly uncertain. It is possible that a coalition of centre-right parties, leading in the polls, will win a majority of its own. One surprise would be a centre-right victory, with the eurosceptic League as the biggest party, possibly enabling its leader to become prime minister. Success for the League, which calls the euro a "failed currency," could revive euro break-up fears and widen the gap between Italian and German bond yields. An election outcome that allows the League or the anti-establishment 5-Star Movement to have a central role in government may have the same effect. And if a government is not formed, fresh elections cannot be ruled out Surprise No. 1: The new electoral law One reason why there is elevated uncertainty around Sunday’s election is the newly-approved electoral law called Rosatellum Bis. The new system makes seat projections very difficult and throws historical lessons out of the window. 2/3 of seats are elected under a proportional voting system and the remaining 1/3 elected in a ‘first-past-the-post’ electoral system – this favors the most prominent people in the parties seats in Parliament, and thus has been criticized by the M5S. Each party needs to get at least 3% of votes in both chambers to get into parliament, while coalitions need 10%. Surprise No. 2: Uncertainty! The high number of undecided voters means that polls and projections have to be taken with a pinch of salt. Politico cites recent polls as saying as much as 30-45%of the electorate is undecided. “Around 10mn Italians haven’t decided yet if they will vote and for whom,” Antonio Noto, head of the IPR polling agency said. “That means that the result may change in a substantial way in the last few days before the vote.” Some political commentators have also suggested that tactical voting may be at play – given the PD are expected to be defeated, we may see center-left voting to block M5S. What about Germany's SPD ballot results? A "thumbs-up" for Germany's coalition deal will suggest modest fiscal expansion, adding in turn to better growth and higher inflation. That could hasten the end of the cheap-money era and keep upward pressure on borrowing costs. If Italy's election too passes without major ructions, it will remove a layer of political risk from the calendar and reinforce the case for unwinding ECB stimulus. Focus can then turn to the next ECB chief, a post that changes hands next year. While speculation is of a German - possibly the hawkish Bundesbank chief Jens Weidmann - taking the reins after the departure of "southerner" Mario Draghi - Germany's Social Democrats say they have not discussed backing Weidmann for the role. But any negative surprise outcome from Italy or Germany could encourage the ECB to keep asset purchases in place beyond their September end-date, in turn prompting investors to rethink the timing of rate rises. Does EUR care? Last Friday a Citi spot EUR trader noted: “I still find the whole Italian election fascinating. No one is talking about it (they shouldn’t), but inside everyone is holding back a little bit (they shouldn’t).” To the point, Citi's options desk noted "something remarkable" about the Italian election: the main characteristic of this event is the lack of significant flows in the short dates. Event variance is stable and this chart below from Bloomberg is a case in point. Bottom line: unlike the much more "exciting" French election last year, the Italian election is not a simple one-off event risk for EUR – "it is not a binary event where one result is market positive, the other negative" as Citi puts it. The most likely outcome is that the prolonged period of coalition talks after the election will play out much like the German elections; as a reminder, after the hung parliament in the 2013 election, it took 62 days to elect a government. In other words, Sunday's event, absent a major surprise, will mean auto-pilot continuity for Italy, and Europe.
Authored by Don Quijones via WolfStreet.com, Just don’t mention “Antonveneta.” A blame game has begun in Italy that risks casting a bright light on the leadership of both the Bank of Italy and Italy’s financial markets regulator Consob. The controversial decision to award the central bank’s current Chairman Ignazio Visco a fresh six-year mandate despite presiding over one of the worst banking crises in living memory has ignited a tug-of-war between political parties and the president, who makes the ultimate decision on who to appoint as central bank chief. The first to cast aspersions was Italy’s former premier Matteo Renzi, who, no doubt in an effort to distract from his own party’s part in the collapse of Monte dei Paschi di Siena (MPS), called into question the supervisory role of both the Bank of Italy and Consob during Italy’s banking crisis. Silvio Berlusconi, a key player in the center-right coalition whose party came out on top in recent elections in Sicily, was next to join the fray. “The Bank of Italy did not exercise the control that was expected of it,” he told reporters in Brussels in response to a pointed question about Visco. As the controversy grows, it risks drawing the role of Visco’s predecessor, current ECB President Mario Draghi, into the spotlight. Many of the key events that helped pave the way to Italy’s current crisis took place during his mandate as governor of Italy’s central bank. And now the skeletons are beginning to crawl out of the closet. It was recently revealed in a Milan court case that in 2010 Italy’s central bank, run by Draghi, knew that MPS’ management had papered over a loss of almost $500 million in 2010 and failed to report it. It’s not the magnitude of the loss that matters, but how it was done and who knew what and when. Bloomberg: A 2010 report from the Bank of Italy … shows inspectors were aware that a 2008 trade struck with Deutsche Bank AG was the mirror image of an earlier deal Monte dei Paschi had with the German lender. The Italian bank was losing about €370 million ($431 million) on the earlier transaction, dubbed Santorini, as of December 2008. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period, the document shows. The newly revealed report — dated Sept. 17, 2010, and marked “private” — shows the Bank of Italy was aware that by choosing not to book the trade at fair value, Monte Paschi avoided showing a loss at the time. If the bank had used a mark-to-market valuation in the fourth quarter of 2008, it would have been included in its year-end report as the credit crisis was cresting, with potentially grave consequences on the bank’s finances. One of the main reasons was to hide the losses racked up from MPS’s purchase in late 2007 of Banca Antonveneta, a mid-sized Padova-based bank. This still-opaque deal is arguably the most important banking scandal in Italy of the last ten years, and it directly paved the way to the collapse of MPS. In its quest for growth at any price, MPS paid €10 billion for Antonveneta, over 50% more than the €6.6 billion Spanish lender Banco Santander had paid just months prior as part of its joint acquisition (with Royal Bank Scotland and Belgian bank Fortis) of Dutch giant ABN Amro. Santander was happy to hold on to the Brazilian side of ABN Amro’s business while hastily disposing of the Italian “assets.” For Monte dei Paschi it was an ill-timed disaster, just as the purchase of ABM Amro’s disparate other parts had been for Royal Bank of Scotland and Fortis, both of which would end up receiving taxpayer-funded bailouts to stay alive once the post-Lehman hangover hit Europe. Clearly, there was a chronic lack of due diligence conducted by the banks’ respective boards as well as by the respective national financial market regulators and central banks. In Italy’s case, that meant the Bank of Italy whose chairman at the time was Mario Draghi. Despite serious misgivings expressed by the director of the Bank of Italy’s office in Padova, A. Minnella, in a letter to the Bank of Italy’s head office in Rome, Draghi signed off on the Antonveneta deal in early 2008. Minella warned of significant “critical issues” in the bank’s technical profiles and competitive positioning, as well as “accentuated problems” that require immediate action by company managers. Antonveneta suffered from serious “financial imbalances” and its sustainability was “at risk,” he added. Yet those warnings were ignored. In recent years the plot surrounding Antonveneta has thickened further. In 2013 an article in the Italian newspaper ‘Corriere della Sera’ alleged that Monte dei Paschi had signed a secret agreement with Santander and JP Morgan Chase to divvy up the profits from the sale and route them through private banks in Switzerland. So serious was the charge that members of Italy’s fraud squad visited Madrid in 2013 to question Santander’s then CEO Emilio Botin over the deal. Then there are the reports that MPS’ acquisition of Antonveneta had a total cost of €17 billion, including a €7 billion loan that Antonveneta owed to ABN Amro, while MPS’ total operating capital was just €4.8 billion. Hence the need for so many complex derivatives trades cooked up by the likes of Deutsche Bank, Nomura and JP Morgan Chase to hide the full scale of MPS’ losses. Some of the bankers responsible are being tried in Italian courts. As has happened in just about every Western jurisdiction since the Global Financial Crisis (bar Iceland), probably no one will be held to account for acts that paved the way to Italy’s existential banking crisis. And that will almost certainly include Mario Draghi, whose name also popped up recently in a banking commission investigating the Bank of Italy’s chronic mismanagement of the crisis that brought down the two Veneto-based banks. Beppe Grillo’s Five Star Movement has even called for Draghi to be questioned by the commission, but every possible effort will be made by Italy’s financial and political establishment to ensure that does not happen. Berlusconi, one of the first people to begin piling pressure on the Bank of Italy, described the attempt to drag Draghi into the morass as reckless. “Involving Draghi is really irresponsible — this is the man whose policies helped stabilize the Italian economy and probably saved the euro too,” he said. The ultimate irony: during his time as governor of the Bank of Italy, Mario Draghi may have played a key role in facilitating the M&A deal that would eventually contribute to breaking Italy’s banking system, but now as ECB president, he has done whatever it might take to keep the Italian economy and its banks afloat, including buying up large amounts of Italian government debt. The ECB is now holding €310 billion of Italian bonds, an amount that exceeds the €246 billion increase of Italy’s national debt since 2012. These aggressive purchases have pushed even the two-year yield below zero (meaning the government gets paid to borrow money). For that alone he can rest assured that Italy’s political establishment has got his back. By Don Quijones. A sharp dose of Deja Vu for Italy’s teetering banks. Read… The Next Italian Bank Threatens to Topple
Paolo Gentiloni weighs offering second-term backing as Ignazio Visco fends off criticisms on oversight
Paolo Gentiloni weighs offering second-term backing as Ignazio Visco fends off criticisms on oversight
At the invitation of the Italian Presidency of the Group of Seven (G7) in 2017, the Istituto Affari Internazionali (IAI) conducted a research project on “Major Challenges for Global Macroeconomic Stability and the Role of the G7” together with a major policy think tank in each of the other G7 member countries: Center for International […]
"Недавно два члена совета управляющих ЕЦБ, Эвальд Новотны (Ewald Nowotny) и Игнацио Виско (Ignazio Visco), поддержали разговоры о том, что ставки в еврозоне могут подняться раньше, чем ожидалось, - отмечает главный стратег по валютам и Глава экономического отдела по Германии Julius Baer Дэвид Коль. - Мы полагаем, что такие ожидания обоснованы, но важно отметить, что оба представителя руководства ЕЦБ говорят об отрицательной ставке по депозитам, которая сейчас находится на уровне -0,4%, а не об основной ставке рефинансирования, которая установлена на нулевой отметке. Отрицательная ставка по депозитам, вместе со стратегией обнародования прогнозов дальнейшей политики и программой закупки активов, является частью нетрадиционной монетарной политики ЕЦБ. Несомненно, в последнее время активизировались споры внутри самого ЕЦБ о порядке, в котором банк будет сворачивать эти меры. Определенно, ЕЦБ хочет всеми возможными способами избежать что-то вроде ситуации в США в мае 2013 года, когда доходы по государственным облигациям выросли на более чем 100 базисных пунктов за очень короткий период времени".