Photo: adolfo barandiaran on flickr
Analysts are excited about the strong possibility that former EU Commissioner Mario Monti will head up a new national unity government in Italy.This enthusiasm—in addition to the passage of a crucial 2012 budget austerity measures—could be generating the fall in yields on Italian bonds today.
Investors are hopeful Monti’s coalition will unite the centre-right and centre-left in a government more focused on passing reforms than playing politics.
Goldman Sachs called this “the most market-friendly outcome” on Tuesday:
[This outcome] would lead over time to a decline in sovereign spreads and in Italy’s risk premium more broadly. The front-end would re-price more than intermediate- and long-term maturity bonds because investors would likely take advantage of the rally to reduce exposure at higher prices. Nevertheless, we would expect BTPs to fall to around 350bp over Bunds in fairly short order.
SocGen analyst Vladimir Pillonca expressed a similar view this morning:
We think that this institutional solution carries the most upside for the credibility of Italy’s economic and fiscal policy. That’s not to say that – even under this scenario – Italy’s political situation is likely to snap into a regime of absolute certainty in a matter of days. But it would certainly be a step in the right direction.
But if recent events in the eurozone are any indication, then such giddiness appears overly optimistic.
First off, a centrist coalition focused on compromise could dilute the power of reforms. While pundits have taken to calling this a “technocrat” government, the simple fact that Monti hails from the EU rather than the domestic political sphere doesn’t mean he won’t play political games. The fact that he has just been appointed a “senator for life” does go a long way towards minimising his partisanship, however politics is still politics at the end of the day.
Secondly, the scale of economic reforms needed immediately could prove an insurmountable obstacle given the mounting market pressure. Even if Monti and his coalition can push through a ground-breaking package, problems in Italy are deep-seated and will not be immediately resolved. There is a strong possibility that the markets could soon render saving Italy impossible, Monti or no.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.