(Imagoeconomica)

(By Nomura)

We provide an update on the Italian political campaign and on our views on the most likely outcomes for the 24-25 February national elections.
The situation remains very fluid, but at this stage we maintain our baseline view as outlined initially in Italian politics to the fore: primaries and electoral law in focus (19 Nov 2012) and mentioned since (for example, our NEMO (8 January) and NEMO (1 February) – a centre-left majority in both houses of parliament with Pier Luigi Bersani as prime minister.

Should Bersani fail to win the Upper House (a scenario which looks increasingly likely), then we believe he will seek and build a coalition with Mario Monti. We view this as more likely than new elections, though a coalition could face difficulty in implementing reforms.
Nevertheless, the risk of ungovernability remains very high, in our view. All the major parties are currently fleshing out their reform agendas and the fragmentation of the political landscape renders it increasingly likely that the shape of the government will be decided as a consequence of post-election alliances rather than from a decisive vote. This is a recipe for instability and we believe it could be a catalyst for uncertainty in the market (which seems to be ignoring the possibility of a hung parliament) and slow reform momentum.
The high number of undecided voters, the loss of momentum of the centre-right and the dispersion of votes to small parties are the major factors to look for in the remaining three weeks of the campaign.
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