Draghi President of the Republic, a threat to the Italian spread?


What would be the impact of the departure of Mario Draghi from the presidency of the Council on the spread Italian? The question torments economists and analysts across the Alps at the start of 2022. The first round of the presidential election, by indirect suffrage, will take place on January 24, in order to appoint a successor to the outgoing Sergio Mattarella. For the time being, no candidate is officially in the running even if Silvio Berlusconi, 85, has expressed his interest. For the financial markets and Brussels, the central question is whether the former president of the European Central Bank (ECB) will run.

The ballot is free and it is not necessary to be a candidate to receive votes, recalls Juliette Cohen, strategist at CPR AM. The only two eligibility requirements are to have Italian citizenship and be at least 50 years old. A round of voting is organized each day and for the first three rounds, it is necessary to obtain a majority of two thirds of the votes to be elected. From the fourth round, a simple majority is enough, which explains why the process is generally quite long. In 2015, Sergio Mattarella was elected in the last round. At this stage, the outcome of the ballot is highly unpredictable, with no coalition achieving the majority of the votes of the grand electors (there are 1,009 of them, including 630 deputies, 321 senators and 58 delegates from the regions). The 5 Star Movements (far left) and the League (far right) will play a decisive role.

Instability, Rome’s worst enemy

In February 2021, the appointment of Mario Draghi at Palazzo Chigi was seen as a relief, in a country crowned with the inglorious title of European champion of political instability and untimely changes of government. His name was, and continues to be, a guarantee of stability and guarantee, especially in the eyes of Brussels. Under the impetus of the former head of the ECB, Italy embarked on ambitious reforms and an investment effort like it had not seen since the post-war period (trains, roads, ports, energies, hospitals, universities, etc.). The country is the first beneficiary of the recovery program financed by the European Union, with 191.5 billion euros, including 69 billion euros in subsidies. ” Growth rebounded strongly by 5.8% according to IMF forecasts and 6% according to government forecasts, greatly exceeding expectations at the start of the year (4.5%) thanks to growth support measures, renewed confidence and a successful vaccination campaign adds Juliette Cohen. However, Mario Draghi is tipped to replace Sergio Mattarella as President of the Republic for a 7-year term, starting in February.

Seven years without executive power, without the possibility of continuing reforms and exercising an essentially ceremonial function, even if it is important to have a solid and trustworthy man in times of crisis. For specialists, the removal of Mario Draghi from operational functions could have serious consequences on the cost of debt.

A spread of 200 points?

Some economists put forward the hypothesis of a spread – yield spread between the Italian 10-year BTp and the German Bund of the same maturity – jumping to more than 200 points, against 140 points today. ” I think investors, especially domestic ones, will look to step in and buy Italian bonds if spreads reach levels of 150bps before the election of the next Italian president. “, tempers Fabio Castaldi, senior investment manager at Pictet.

The precise impact of Mario Draghi’s election to the Quirinal Palace will actually depend on how long it takes to form a new coalition and a new government. If an agreement manages to be negotiated to save the current mandate, and therefore avoid general elections before mid-2023, the impact will be positive in the short term for the Milan Stock Exchange and the spread. In the medium term, however, the difficulties could reappear. In the opposite case where the talks fail, the equity market, like the spread, could react very badly. ” Added to this is the risk that reforms will be delayed and that European funds will not be used as efficiently or that their disbursements will be postponed, which would be negative for Italy’s growth potential. “, points out Juliette Cohen.




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