The political truce in Italy following
Berlusconi’s sentence last week remains fragile1 and many uncertainties of a legal nature make the
situation particularly complex. We present an update on the most
important issues regarding Italy for the next few weeks. We see
little of a substantive nature in August apart from political
manoeuvring, whereas September might be a crucial month. We
continue to assume that, despite some bellicose rhetoric, no party
really has an incentive to seek early elections and that president
Napolitano would continue to strongly oppose such an
outcome.
1)
Vote
on Berlusconi’s loss of Member of Parliament status
This is seen as key by many members
of the centre-right coalition and the fate of the government might
depend on whether Berlusconi will be stripped of his MP title.
Despite the sentence on Berlusconi’s ban from public office being
sent back to the Court of Appeals for another trial, a law
introduced by the Monti government rules that a definitive prison
sentence of more than two years prompts a procedure of a loss of MP
status. As discussed in a previous note2, in order to strip an MP of their title, there
has to be a vote by a Parliament subcommittee on a proposal,
followed by a vote in Parliament, and historically it has been
usual for the vote to be delayed for quite a long
time.
A proposal produced by a centre-right
member has been scheduled for discussion on 9 September, with a
vote to follow shortly. If approved by the subcommittee, the
proposal could be then voted in Parliament. According to the media,
if the proposal is voted down by the subcommittee, a new member
will be tasked to produce another proposal, further lengthening the
time of the procedure.
Adding to the confusion, some media
speculated that the law introduced by the Monti government might
not apply to crimes committed before its approval.
3 If true, this would allow Berlusconi to keep his
MP title even when serving his prison sentence until the Court of
Appeals takes a decision. This should take a few months at least
and would help lower the political tension. We do not take a view
on this hypothesis.
There is little controversy around
Berlusconi’s prison sentence. As discussed previously, the
effective term is one year, most likely spent in house arrest or in
social services.
2)
Change
to the electoral law
Over the past few years there has
been no agreement on how to change the controversial electoral law
(referred to as “Porcellum”) that was introduced in 2005 and used
in the 2006, 2008 and 2013 elections. A Parliament subcommittee is
expected to discuss changes to the law in September with the
theoretical possibility of a vote in Parliament on a proposal as
early as October. However, keeping in line with the historical
tradition, there seems to be no agreement among parties on how to
change the law.
However a stall on the electoral law
is not a long-term option as a Constitutional Court ruling is
scheduled for 3 December. The court has been asked to rule on
whether some parts of the entire electoral law are constitutional.
In the former case the Parliament might be tasked to revise the
law, whereas in the latter case, the previous law might
automatically become the new law. The previous law is referred to
as “Mattarellum”, and was used in the 1994, 1996 and 2001
elections. 4
At the moment, it is unclear how the
mapping from votes to seats in Parliament would change in the case
of a move from the current law to the old one in the situation of
new elections, but we believe that at the margin it should favour
the probability of avoiding a hung Parliament situation. Media
articles5
have recently speculated that
elections might not be held before December because of the risk of
the election been deemed “illegal” after the Constitutional Court
ruling, but there is no official confirmation.
3)
Centre-left
leadership
A new secretary of PD has to be
elected after Bersani’s resignation in the spring, but there is an
ongoing discussion about the date and rules to elect the new
secretary and potential PM candidate in the situation of early
elections. The interim secretary announced yesterday that the PD
National Assembly will be held on 20-21 September, but no official
date for the party congress has been set despite some indication
last night that this could take place on 24 November. Some domestic
media describe the impasse within PD as an internal struggle
between Renzi, popular but politically isolated within the party,
and the old guard. According to most polls, Renzi would have fared
better than Bersani in the February elections and remains one of
the most popular politicians across the political spectrum.
Therefore, Renzi’s nomination as PM candidate might reduce the
appeal of seeking elections for the centre-right.
4)
Possible
dates for elections in 2014
There are some soft constraints on
elections also in 2014. Italy will take the rotating presidency of
the EU in 2H14 and having elections during that period might be far
from ideal from the point of view of running the EU agenda. Also in
June-July a new European Commission will be elected after the vote
for the European Parliament on 22-25 May, and the lack of a
government might hamper Italy’s ability to negotiate with the other
countries. Pending the Constitutional Court decision on the
electoral law, this would make a vote in the spring the most
likely.
5)
Rating
agencies (S&P: BBB Neg, Moody’s Baa2 Neg, Fitch: BBB+ Neg,
DBRS: A low Neg)
Although a political stalemate might
still be considered a satisfactory result for financial markets,
rating agencies might not be as patient. There are two important
thresholds to pay attention to: 1) A fall to sub-investment grade, which could
trigger some forced selling, although recent measures adopted at
European and Italian levels are an attempt to avoid automatic
selling triggers; 2) A decline in the DBRS rating below the A area,
which would prompt a 5% additional haircut on Italian sovereign
securities funded at the ECB (Exhibit 1).
We see limited risk of a fall below
investment grade, especially given the recent pick up in the macro
indicators. S&P downgraded Italy two notches above
sub-investment grade in July6, with limited impact. Moody’s reaffirmed Italy’s
rating at the end of April and in May it stated that Italy’s
stronger budgetary performance still justifies a better rating
compared to Spain. Fitch downgraded Italy in March after inclusive
elections, but the rating is still three notches above
sub-investment grade.
The risk of a DBRS downgrade is more
concrete: a few days ago the rating agencies stated the probability
of a downgrade of Italy (and Spain) is higher than 50% over the
next 12 months and further political uncertainty might not be a
welcome development. The negative implications should be contained
and felt more at the short end of the curve. The latest Bank of
Italy Financial Stability Review shows that around 50% of the
almost €400bn assets pledged by Italian banks with the Eurosystem
are dependent on the Italian sovereign rating. Mechanically a 5%
average haircut increase on almost €200bn would imply additional
collateral needs of €10bn, but we highlight that:
1)
only around 3/4 of the assets pledged
are used for ECB funding and 2) free ECB eligible collateral in the Italian
banking sector amounts to more than €200bn (as of February 2013,
unlikely to have changed dramatically since).
6)
Bond
supply dynamics
Italy has issued €161bn of bonds
year-to-date covering 2/3rd of their 2013 gross bond funding needs of €243bn,
based on our forecasts (Exhibit 2). Italy has also covered more than 70% of its
net-funding needs for 2013 (based on our forecasts) putting them in
a good position for rest of the year. Italy has also made good
progress in tackling the issue of declining weighted average
maturity of debt in 2013 as it issued nearly a quarter of its total
conventional issuance in the ultra-long end. As discussed
previously, primary and secondary market statistics have improved
significantly in 2013.
In conclusion, we continue to monitor
the political situation with attention, but, for the time being, we
remain positioned for a further compression of peripheral spreads.
For details on our trade recommendations, see Global Fixed Income
Markets Weekly, Euro Cash, published later today.
1 See Italy update: Government likely
to survive regardless of legal decision on
Berlusconi, G. Salford, 1
August and Italy update: Berlusconi
conviction has limited implications, hold intra-EMU
tighteners, G. Salford, 2
August.
2 See Italy update: Government likely
to survive regardless of legal decision on
Berlusconi, G. Salford, 1
August.
4 3/4 of the seats are allocated with a first past
the post system and the remaining 1/4 with a proportional system.
Compared to the current law, “Mattarellum” tends to result in a
more similar seat allocation in the Lower and Upper
house.
6 See Expect limited impact from Italy
downgrade, G. Salford, 10
July.
Exhibit 1: A DBRS rating downgrade below the A area would trigger a
5% additional haircut on Italian sovereign securities funded at the
ECB
Haircuts on Category I
collateral used at ECB funding operations*;
* The ECB uses the best
rating of S&P, Moody’s, Fitch and DBRS to determine the rating
threshold.
Source:
ECB
Exhibit 2: Italy has covered a good part of its 2013 funding needs
already
YTD realised and J.P.
Morgan forecast of 2013 Italian gross and net issuance*;
€bn
* We track supply on
auction date basis rather than on settlement date
basis.
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