To Italeave Or Not? Confused European Traders Shift Attention Away From France

A quick glance at the soaring Italian stock market and one would have faith in the future of the euro, with Alitalia just a "storm in a teacup". However, bond traders are as worried about political uncertainty as ever with Italian bond risk surging to over 3 year highs.

As Bloomberg reports, the FTSE MIB Index is trading near a 15-month high after ex-Prime Minister Matteo Renzi resoundingly won back the leadership of the Democratic Party.

But bonds tell a slightly different story, with a wider yield spread to France showing investors are wary of the country’s political uncertainty as Renzi faces an uphill battle to regain his role as prime minister.

So which one to believe? Bonds (Italeave) or Stocks (Rome-ain)?

Italy Increasingly Likely To Abandon The Euro

Submitted by Mike Shedlock via MishTalk.com,

An analysis of the political setup in Italy shows eurosceptics are on the verge of taking control of the country.

The only missing ingredient is an early election. And early elections are now the odds-on favorite.

Let’s back up a bit to fill in the pieces as to how things got to this point.

1. Former prime minister Matteo Renzi stepped down in December after holding a referendum that failed miserably. See Renzi Resigns Following Crushing Referendum Defeat: Beppe Grillo, Marine le Pen, Matteo Salvina Tweets


2. Italy’s president, Sergio Mattarella, appointed Paolo Gentiloni as the new prime minister after Renzi resigned. See Meet Paolo Gentiloni, 4th Consecutive Italian Technocrat Appointed Prime Minister: Renzi Not Vanquished Yet


3. The president said he would not hold new elections until differences between how the lower house of parliament assigned seats.


4. Point number three has been resolved. Both houses of Parliament are back on a proportional system.

New Elections

• New elections are possible now but the next scheduled elections are not until 2018.


• Matteo Renzi wants new elections in June. Even though he resigned, he wants back in. Renzi wants new elections this year because PD may oust him if he waits.


• Beppe Grillo wants elections as soon as possible because he believes he will win, and also because FI leader Silvio Berlusconi cannot run for prime minister until 2018 because of a tax fraud conviction.


• Berlusconi does not want early elections, but he is in the minority.

It is up to the president to call new elections, and there is pressure form at least two fronts for him to do so.

Election Polls

Chart from Opinion polling for the next Italian general election.

The situation for Renzi is actually way worse than it appears. Not only do polls tend to over-play support for PD, the party is about to splinter. Via email, Eurointelligence explains …

Whatever Happens in Italy, Grillo is Winning

Our pessimism about the political outlook for Italy was confirmed once more this morning with reports that the PD is now very likely heading for a split – the trigger being disagreement over the election date. Pier Luigi Bersani, Renzi’s predecessor as general secretary of the party, came out strongly against early election in June saying that the PD would be finished as a party if Renzi were to go ahead.

Renzi could assemble a majority in the Italian parliament in favour of a new electoral law and early elections, so this is technically doable. The question is, at what cost? Beppe Grillo’s Five Star Movement officially supports early elections, but Renzi probably has a point when he says that another year of political chaos in the PD would drive even more voters to Grillo, whose party thrives on the chaos in the country. In other words, Grillo wins both ways, and the likely design of the electoral law will also be favourable to his party. So much for the theories that there would be a technical stitch-up to keep the Five Star Movement out of power. The Italian establishment is not sufficiently united to be able to do this.

Massimo D’Alema, Renzi’s fiercest oponent within the PD, says he has done research on the potential electoral support for a party to the left of the PD which could count on 11-14% of the vote. With a weak centre-right and a fragmented left, the probability of a victory by the Five Star Movement, perhaps in alliance with other radical forces, must now be considered very high.

Wrong Five Ways

The don’t worry, it will never happen crowd said …

1. Renzi would win the referendum – Wrong


2. Renzi would not resign if he lost – Wrong


3. Renzi would gracefully step aside after he resigned – Wrong


4. PD would not splinter – Wrong


5. The other parties would pass legislation making it impossible for M5S to gain control – Wrong

That same don’t worry, it will never happen crowd also proposed

1. An alliance between Grillo and other parties won’t happen


2. If an alliance does happen, parliament will not approve a referendum on the Euro


3. If there is a referendum on the Euro, people will vote against leaving


4. It still requires a constitutional amendment

Point number 6 is in the works right now. And if such an alliance does form and win (both are highly likely in my opinion), then all that is left to stop “Italeave” is fearmongering and points 8 and 9.