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News Analysis: Markets nervous, foreign leaders quiet as Italy moves to cusp of installing populist PM

Source: Xinhua    2018-05-24 00:20:49

by Eric J. Lyman

ROME, May 23 (Xinhua) -- Financial markets reacted nervously on Tuesday to the near certainty that Italy was on the verge of installing its first populist government, while foreign leaders took a wait-and-see attitude about the likelihood that law professor and political newcomer Giuseppe Conte will be the country's next prime minister.

Conte made headlines earlier this week when reports emerged that he may have lied about his educational background on his curriculum vitae. But the populist Five-Star Movement and anti-migrant League parties stuck by their support for Conte, and on Tuesday the 53-year-old was scheduled to meet with Italian President Sergio Mattarella.

Mattarella was expected to grant Conte a mandate to form what will be Italy's 66th government since the end of World War II. If that indeed happens, Conte will be the 28th man to hold the job over that span.

Markets are jittery about a political novice as head of government in Europe's fourth largest economy.

The yield on the benchmark ten-year Italian government bonds has risen precipitously in recent days, approaching the 2.5-percent barrier on Wednesday for the first time since 2014. As recently as March, the yield was 1.5 percent. Bond yields are a measure of investor confidence in a country's economic prospects, with a higher yield indicating more perceived risk.

Similarly, the Italian Stock Market in Milan has lost 7.5 percent of its value since reaching its highest point of the year on May 7.

But according to Francesco Giavazzi, a political economist with Bocconi University in Milan, the release of updated reports on Italy from major rating companies next week could have an even bigger impact.

"Italy's debt is now only two steps above non-investment grade, so any downgrades would be very worrying," Giavazzi told Xinhua. Such a big downgrade is unlikely to happen all at once, but any step in that direction would bring Italian bonds closer to being ineligible for investment funds, to serve as collateral with the European Central Bank. In that scenario, yields would spike.

Giavazzi said rating agencies would take the policies of a new government into account in its judgment.

"They will be collecting and evaluating information on Italy right up until the last minute," the economist said.

Political leaders in other major European states -- Germany, France, Spain, and Great Britain -- have so far mostly been mum about the prospects of the new government.

"I think there is some nervousness but most leaders will be cautious and wait to see what happens," author and political commentator Sandro Albanese said in an interview.

The next government will be built on support from two political parties headed by inexperienced figures -- this will be the first foray onto the national stage for the Five-Star Movement's Luigi Di Maio and Matteo Salvini from the League -- and with a prime minister who has never served in government.

The Five-Star Movement-League platform is also worrying to many outside Italy: it promises a 100-billion-euro (120-billion-U.S. dollar) spending spree, including a flat income tax and increased government services. The platform calls for a dramatic crackdown on migrants in Italy and a possible referendum on Italy's future use of the euro currency.

Editor: yan
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Xinhuanet

News Analysis: Markets nervous, foreign leaders quiet as Italy moves to cusp of installing populist PM

Source: Xinhua 2018-05-24 00:20:49

by Eric J. Lyman

ROME, May 23 (Xinhua) -- Financial markets reacted nervously on Tuesday to the near certainty that Italy was on the verge of installing its first populist government, while foreign leaders took a wait-and-see attitude about the likelihood that law professor and political newcomer Giuseppe Conte will be the country's next prime minister.

Conte made headlines earlier this week when reports emerged that he may have lied about his educational background on his curriculum vitae. But the populist Five-Star Movement and anti-migrant League parties stuck by their support for Conte, and on Tuesday the 53-year-old was scheduled to meet with Italian President Sergio Mattarella.

Mattarella was expected to grant Conte a mandate to form what will be Italy's 66th government since the end of World War II. If that indeed happens, Conte will be the 28th man to hold the job over that span.

Markets are jittery about a political novice as head of government in Europe's fourth largest economy.

The yield on the benchmark ten-year Italian government bonds has risen precipitously in recent days, approaching the 2.5-percent barrier on Wednesday for the first time since 2014. As recently as March, the yield was 1.5 percent. Bond yields are a measure of investor confidence in a country's economic prospects, with a higher yield indicating more perceived risk.

Similarly, the Italian Stock Market in Milan has lost 7.5 percent of its value since reaching its highest point of the year on May 7.

But according to Francesco Giavazzi, a political economist with Bocconi University in Milan, the release of updated reports on Italy from major rating companies next week could have an even bigger impact.

"Italy's debt is now only two steps above non-investment grade, so any downgrades would be very worrying," Giavazzi told Xinhua. Such a big downgrade is unlikely to happen all at once, but any step in that direction would bring Italian bonds closer to being ineligible for investment funds, to serve as collateral with the European Central Bank. In that scenario, yields would spike.

Giavazzi said rating agencies would take the policies of a new government into account in its judgment.

"They will be collecting and evaluating information on Italy right up until the last minute," the economist said.

Political leaders in other major European states -- Germany, France, Spain, and Great Britain -- have so far mostly been mum about the prospects of the new government.

"I think there is some nervousness but most leaders will be cautious and wait to see what happens," author and political commentator Sandro Albanese said in an interview.

The next government will be built on support from two political parties headed by inexperienced figures -- this will be the first foray onto the national stage for the Five-Star Movement's Luigi Di Maio and Matteo Salvini from the League -- and with a prime minister who has never served in government.

The Five-Star Movement-League platform is also worrying to many outside Italy: it promises a 100-billion-euro (120-billion-U.S. dollar) spending spree, including a flat income tax and increased government services. The platform calls for a dramatic crackdown on migrants in Italy and a possible referendum on Italy's future use of the euro currency.

[Editor: huaxia]
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