Analysis: Upcoming Italian elections viewed as 'risk event' by experts

Economists, policymakers and analysts alike have been weighing in on the potential economic ramifications of the forthcoming parliamentary election in Italy this weekend.

The Eurozone's third largest economy faces a variety of economic challenges in the years ahead as it attempts to tackle a £2trn stock of public debt.

Morgan Stanley view: Italian election a "crucial risk event" Daniele Antonucci, Senior European Econmist at Morgan Stanley, described the elections as "a crucial risk event" explaining that while polls presently suggest a centre-left majority in the Lower House, the situation in the Senate remains "a lot more uncertain".

He said that a hung parliament might push the centre-left and centre to form an informal alliance on certain themes. While, on the one hand, having former Premier Mario Monti in the picture could give investors a sense of continuity, he warned: "one risk is that such a broad coalition looks quite heterogeneous and somewhat unstable."

"The next political leaders are likely to maintain sound fiscal policies, with Italy's primary budget surplus expected to rise further. But whether the pace of economic reform will accelrate meaningfully remains to be seen," Antonucci added.

Political developments' impacts on Italian financial markets Antonucci also saw a chance that the government's willingness to pursue needed reforms could be hindered by "discontent" and commented on the historical impact of government woes on financial markets.

"Historical evidence suggests that political developments affect Italian financial markets. In the two weeks before and after a government collapse, the cumulative rise in interest rates is about 24 basis points and equity markets fall by around 5%. What's more, asset prices continue to decline during the gap between the end of the previous and the start of the new government."

He goes on to say that: "With the vote ending at 2:00pm London time on February 25th, the chances are that the first exit polls will be published when the market is open."

Credit Suisse view: Uncertainty looms over stability of theoretical coalitionAn independent analysis of the Italian elections researched by the European Economics Team at Credit Suisse concurred with the Morgan Stanley view insofar as the election represented a "significant risk event."

The team pointed to uncertainties relating to three areas: "First, to the progress of Silvio Berlusconi's centre-right group in the polls in recent weeks. Second, to the trend in the protest vote, which has been rising again in the last couple of weeks according to the polls.

"Third, even if the centre-left does manage to reach an agreement with the centrists, it is still unclear if the government would have sufficient seats to form a solid majority, and if the coalition would be sufficiently stable."

As regards this last possibility the Swiss broker assigns a 21% probability to the risk of a a 'hung' parliament where in the stability of the new coalition government is not sufficient.

Yet even should a numerically strong coalition materialise Credit Suisse highlights that "it is important to note that such a scenario would be a clear positive for markets only if a convincing agreement was reached between the centrists and the centre-left, and that the majority in the Senate was seen as "sufficient" (at least 170-180 seats, but ideally more, in our view, given the required minimum majority of 158) to withstand the risk of defections in the ranks of the majority as the legislature proceeds and reforms are implemented."

In particular, these economists point out the differences which exist between the centre-left and centre regarding the perceived need to make the labour market more flexible. That is one of the crucial reforms which lies ahead.

MF