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Quirinal election: decisive week for the spread, where it can go

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Quirinal election: decisive week for the spread, as far as it can go24

by Lorenzo Palma

With the election to the Quirinale for the new President of the Republic today begins a crucial week not only for the political world but also for the Italian public accounts and the spread between BTP / Bund.

In this context, Barclays Research speculates three possible scenarios for the BTP and Bund spread German, with a deviation ranging from 120 to 200 points.

Quirinal election: scenarios for the spread

The combinations are three: but at the moment they are more complicated than those of the lottery; concern the role it will occupy Mario Draghi and the repercussions that this role will have on the spread. Whether the current Prime Minister will become, or will not be, the next President of the Republic and what will happen in relation to the differential between the yields of the BPTs and the German Bund.

The difference is 80 points, between 120 and 200, according to the authoritative study by Barclays Research, which has drawn up a report that foreshadows three macro-scenarios.

1) In positive scenario, considered the most likely by the study, sees Draghi elected to the Quirinale and a institutional government – perhaps led by some current technical ministers – supported by a large majority; Draghi al Colle and a more political government with a more unstable majority and, third hypothesis, Draghi who remains at Palazzo Chigi and a President of the Republic elected by a large majority by the electors. In any case, political stability will be guaranteed. The spread should therefore not exceed 150 basis points in this case (just above where it is today).

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2) In negative scenario instead, the spread could reach 170 basis points, a value that has not reached since July 2020. In this case, a divisive and narrow majority President of the Republic could be elected, causing the coalition that supports Mario Draghi in government to lose pieces as well.
Or it would be Draghi himself who would be elected President, before being forced to announce early elections and the end of the legislature. Both scenarios are unlikely for Barclays.

3) Then there is it worst case scenario: and that’s what Draghi sees out of the game: not elected to the Quirinale and ousted from Palazzo Chigi due to early elections. And it skyrocketing spreads.
It should be noted that the Italian spread has already begun to gain ground in recent weeks, above all due to the general rise in interest rates led by the American Fed to combat inflation.

Even the performance of the Bund 10-year-old German, for the first time since 2019, has revised the positive territory by exceeding 0 per cent. ” We expect several headwinds in the first quarter of this year to create a tough environment for sovereign spreads – a US bank note reads – given reduced QE support and rising issuance, so we believe widening of the BTP-bound spread observed in the first ten days of the month may extend “.

In addition to “dynamics of less favorable offers, it is probable that the political risk for BTPs will increase until the first round of the Italian presidential elections on January 24”.
The study concludes by noting that “if Mario Draghi were to move from Palazzo Chigi al Quirinale there would likely be a loss of political continuity and a potential delay in the implementation of the Recovery Fund

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