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Questo articolo è stato pubblicato il 01 febbraio 2013 alle ore 12:27.

My24
Italy and the political cliff

by Morgan Stanley

Italy's experiment with its 1-year old technocratic government is coming to an end earlier than expected. The chances are that an elected government will follow, with elections possibly as soon as next February.

With austerity taking a toll on an already weak economic fabric, the risk is that discontent might well continue to rise, thus affecting the next government's ability or willingness to pursue bold reforms – or result in a tough anti-reform election campaign at the very least.

Historical evidence indicates that, close to a government collapse, the cumulative rise in short-term interest rates is about 24bp. Similarly, equity markets fall by around 5% over the same period. These effects have tended to reverse after a government change.

If market pressure were to resume in full force, the OMT backstop might be a possibility. But the hurdle to apply for sovereign support – if needed – is probably higher than elsewhere, and difficult to negotiate in the midst of an election campaign.

There are some tentative signs that the economy is shrinking at a slower pace, as the bulk of the budget correction is behind us. But one risk is that interest rates – which have recently been lower than expected and better behaved –will start rising again, as they've been doing over the past couple of days.

Will the fiscal policy path change? Not really. Its direction is set, we think. U-turns are unlikely. Could someone envisage, say, a reduction in the pension age, now that it has been raised and index to life expectancy? That seems too far-fetched, as markets would punish such slippage.

The most pressing question for the next Italian government is how to strengthen the country's economic fabric, and achieve a ‘new normal' with sustained growth. More than anything else, this is what will determine the views of market participants on the reform path of Italy's next political leaders.

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