|
* Polls appear to
confirm that the Monte Paschi scandal has tightened the Italian
election
* We
still think the centre-left will take the lower house, but with a
slightly reduced degree of certainty
*
European policymakers are beginning to take the possibility of a
Berlusconi win more seriously (although we still think it is
unlikely)
* We
look at possible scenarios for the region if he is able to
capitalise on recent momentum and close the gap
Before the Monte Paschi
(MPS) scandal, Italy was set for a close election on Feb
24th/25th but there seemed to be little
likelihood of Silvio Berlusconi closing the gap in the lower house,
with polls showing the centre-left at least 8-10 points ahead. Over
the past week the scandal has helped narrow the gap to 5-6 points
in the national polls, which we consider to be in the danger zone.
While six points may be considered a comfortable lead in many
countries, Italian polling has historically underestimated support
for Berlusconi by around 3%. This is as a result of voters feeling
uncomfortable about revealing their preferences to pollsters; the
effect could be even more pronounced in this election cycle (given
the concerns around a Berlusconi victory), and may be worth around
4 points – if the polls are not displaying existing bias. On that
basis, we would estimate the centre-left to hold a real lead
somewhere in the 1-3% range; well below the margin of comfort (see
chart).
However, the accuracy
of some polling could be questioned, since many of the polls
available are connected to the Berlusconi press and the possibility
of bias exists. There is also evidence that polls at regional level
(for Senate votes) are showing an increase in support for the
centre-left, suggesting that any pro-Berlusconi trend is not
uniform. However, regardless of the absolute levels; the direction
the polls are travelling in (at least for the lower house) appears
to be clearly in favour of Berlusconi.
Risks
rising too close for comfort?
It is possible that the
impact of the MPS scandal, and recent positioning by Berlusconi
(including veiled bids for far-right support, and a populist
position on tax) could prove short-lived. However, to have more
clear comfort on a centre-left win we would need to see the gap
beginning to widen again in the coming days. This is unlikely to
happen; no more official polls will be made available after
February 8th, so it will be unclear precisely
how much momentum Berlusconi has gained, and whether the trajectory
of voter intentions will continue to move in his favour. Two
set-piece events in the courts may muddy the waters even more;
there is to be are a further hearing on the MPS scandal on Feb
20th (which could set the tone for the
final days of the campaign), as well as a hearing in one of
Berlusconi’s own trials. Overall however, the MPS events, and the
way in which they have been reflected in polling data over the past
week, lead us to shorten the odds on Berlusconi closing the gap on
the centre-left. A recent dip in support for Monti and a poll boost
for the radical 5 star movement complete a challenging picture for
the centre and centre-left.
Sticking with our
call
Despite this movement,
the choice of outcomes still looks much as we anticipated last
month. If the centre-left manage to hang on in the lower house as
we expect, they should also be able to patch together a deal with
Monti and the centrists in the Senate. The lower house is
essentially winner takes all (55% of seats to the first placed
party), while the Senate uses the same system on a region by region
basis. Our analysis still shows that Berlusconi is very unlikely to
win control of the Senate without the kind of nationwide
performance which would also hand him the Chamber, especially as
regional polls show him further behind (see ‘Italian
election: expect short-term relief, long-term
doubts’). We
continue to think Berlusconi is likely to secure a powerful voice
in both houses but will fail to reach a governing majority (see
charts below).
But,
what if…..?
Like us, European
policymakers have (so far) regarded a Berlusconi victory as a
tail-risk event, but they are now increasingly focused on the need
to prepare for such a potential outcome. Concentrating their minds
is a possible worse-case scenario, the ‘bad’ trajectory which we
lay out below. We also lay out a more likely trajectory of events
as we think they might unfold if Berlusconi were to
win.
A bad
trajectory
The worst fear for
regional policymakers is that a Berlusconi victory, if managed
poorly, results in heavy market pressure on Italy - ultimately
forcing it to seek an ESM-ECCL package as a precursor to activating
the OMT. German MPs would then be forced to vote on a support
package that opened the door to ECB intervention for Italy with all
of their moral hazard questions remaining unanswered (and with a
Berlusconi Government the recipient of any support). Voters in
Germany would be left asking serious questions about the OMT
(effectively being faced with the evidence of what the ECB
commitment can mean) and punish the Chancellor accordingly. Add in
the (currently rather remote) fear of Draghi being further damaged
by the MPS scandal and there is a risk of a very damaging hit to
sentiment and to the prospects of Chancellor Merkel’s reelection.
We think this is unlikely to happen; but it is the scenario that
policymakers are focused on avoiding.
A more
likely trajectory
We think any scenario
in which Berlusconi wins is unlikely to be positive for the broader
region, but it is unlikely to be as damaging as the worse case
scenario. All sides have an interest in compromise and managing the
fallout; not least Berlusconi himself who will not want to have his
election greeted with a major sell off in financial markets. We
think there is a strong chance that he will seek to lead behind
more consensus candidates (and may even try to persuade Monti to
stay on). Berlusconi would obviously retain enormous influence over
the policy direction any incoming Government might take, but has
already indicated that he would take the Economy Ministry rather
than the premiership. We would expect a significantly less hostile
approach towards the rest of the region than we have seen so far on
the campaign trail, Berlusconi would likely come back towards the
centre-ground on his engagement with Germany in
particular.
For their part, German
policymakers are likely to play ball with such an approach. No one
in Europe would be more concerned about a Berlusconi victory than
Chancellor Merkel, who has her own tough campaign leading up to the
election in September. Moral hazard issues around the OMT and Italy
will be uppermost on her mind. However, we would also expect a
conciliatory approach in the near-term; Germany will have a strong
interest in making sure that the situation doesn’t get out of
control and will likely take constructive steps near-term
(especially if there are other Government figures in Rome that the
Chancellery feels it could deal with). The Chancellor will need to
walk through some extremely delicate ground, too conciliatory an
approach will risk a domestic political backlash, but the key
objective will be to avoid the form of overt market pressure that
could lead towards an OMT request. Over time, a new Government
could potentially come to look more like the Monti administration;
a fissiparous coalition of interests with Berlusconi wielding (much
stronger) influence behind the scene.
Both
sides would deal, but damage would nonetheless be
substantial
Until now, the
prevailing strategy from the rest of Europe has been to both hope
and assume that Italians will vote against Berlusconi. Discussions
are now beginning to take place about how to manage an eventuality
that had previously been seen as a remote tail risk. The region
should be capable of managing the impacts of a Berlusconi win, but
the political costs (particularly in Germany) could be large. At
present, all of these outcomes remain unlikely – but somewhat less
so than they appeared a few weeks ago.
Senate
results: Estimates, 18th
January
and 4th
February
|
|
Centre-right
|
Centre
|
Centre-left
|
Left
|
5
stars
|
|
National
|
110
|
36
|
133
|
3
|
33
|
|
Valle
d'Aosta
|
0
|
0
|
1
|
0
|
0
|
|
Piemonte
|
5
|
2
|
13
|
0
|
2
|
|
Liguria
|
1
|
1
|
5
|
0
|
1
|
|
Lombardia
|
27
|
5
|
11
|
0
|
6
|
|
TAA
|
1
|
0
|
6
|
0
|
0
|
|
Veneto
|
14
|
3
|
4
|
0
|
3
|
|
Friuli VG
|
4
|
1
|
1
|
0
|
1
|
|
Emilia
Romagna
|
4
|
2
|
13
|
0
|
3
|
|
Toscana
|
3
|
2
|
10
|
0
|
3
|
|
Marche
|
1
|
1
|
5
|
0
|
1
|
|
Umbria
|
1
|
1
|
4
|
0
|
1
|
|
Lazio
|
6
|
3
|
16
|
0
|
3
|
|
Abruzzo
|
1
|
1
|
4
|
0
|
1
|
|
Molise
|
1
|
0
|
1
|
0
|
0
|
|
Campania
|
16
|
4
|
5
|
2
|
2
|
|
Puglia
|
4
|
3
|
11
|
0
|
2
|
|
Basilicata
|
1
|
1
|
4
|
1
|
0
|
|
Calabria
|
2
|
1
|
6
|
0
|
1
|
|
Sicilia
|
14
|
4
|
4
|
0
|
3
|
|
Sardegna
|
2
|
1
|
5
|
0
|
0
|
|
Foreign
|
2
|
0
|
4
|
0
|
0
|
|
Centre plus
centre-left
|
|
|
|
169
|
|
Source:
JP Morgan Rates Strategy
|
|
|
Centre-right
|
Centre
|
Centre-left
|
Left
|
5
stars
|
|
National
|
110
|
35
|
136
|
2
|
32
|
|
Valle
d'Aosta
|
0
|
0
|
1
|
0
|
0
|
|
Piemonte
|
5
|
2
|
13
|
0
|
2
|
|
Liguria
|
1
|
1
|
5
|
0
|
1
|
|
Lombardia
|
27
|
5
|
12
|
0
|
5
|
|
TAA
|
1
|
0
|
6
|
0
|
0
|
|
Veneto
|
14
|
2
|
5
|
0
|
3
|
|
Friuli VG
|
4
|
1
|
1
|
0
|
1
|
|
Emilia
Romagna
|
3
|
2
|
13
|
0
|
4
|
|
Toscana
|
3
|
2
|
10
|
0
|
3
|
|
Marche
|
1
|
1
|
5
|
0
|
1
|
|
Umbria
|
1
|
1
|
4
|
0
|
1
|
|
Lazio
|
5
|
4
|
16
|
0
|
3
|
|
Abruzzo
|
1
|
1
|
4
|
0
|
1
|
|
Molise
|
1
|
0
|
1
|
0
|
0
|
|
Campania
|
16
|
4
|
5
|
2
|
2
|
|
Puglia
|
4
|
3
|
11
|
0
|
2
|
|
Basilicata
|
2
|
1
|
4
|
0
|
0
|
|
Calabria
|
3
|
1
|
6
|
0
|
0
|
|
Sicilia
|
14
|
3
|
5
|
0
|
3
|
|
Sardegna
|
2
|
1
|
5
|
0
|
0
|
|
Foreign
|
2
|
0
|
4
|
0
|
0
|
|
Centre plus
centre-left
|
|
|
|
171
|
|
Source:
JP Morgan Rates Strategy
|
|
