Italy – In the Aftermath of the Coup

Published on February 13, 2014

Italian Prime Minster Enrico Letta, resigned to his fate, stepped down a few hours ago and cleared the way for his ambitious and more popular fellow PD Party member and leader, Matteo Renzi, to take over the crown.

In fact, of course, the pressure on Letta had been building over the last few days, and as you may recall from our report yesterday (SGH 2/12/13, “Italy: A Coup for Stability”), Letta’s fate had already been quietly sealed yesterday in the back rooms of the PD party, which for now at least, aligned with the small parties, and Berlusconi (albeit for different reasons), with a common interest in passing the crown to Renzi.

*** Do not be overly alarmed by New Center-Right Party leader Angelino Alfano’s very non-committal and lukewarm public endorsement of Renzi now hitting the wires in the immediate aftermath of the Renzi coup, specifically that he will “evaluate” Renzi’s proposals and that his party is ready for a vote if needed. Early elections would indeed be disruptive to markets, but our understanding is that Alfano will at this point be jockeying for cabinet position, more than anything. Informed sources point at a net loss of four ministers by Alfano’s party, so expect some old-style political bargaining there. ***

*** Indeed, Alfano has little interest in early elections, where Renzi would be the clear front-runner. And were Alfano to run, he might even potentially have to fall back under the fierce, and perhaps now vengeful, tent of Berlusconi, who he abandoned rather ignominiously. Renzi will be negotiating with him from a relative position of strength. ***

Italian BTP bonds at first sold off but then rallied as the news hit today, and markets came to understand that, as we noted in yesterday’s report, this hand-over will be seen as a sign of increased political stability. Despite these potentially unsettling headlines, we believe that still remains the case.

And the PD is united behind Renzi (the vote count in the general assembly was 136 to 16). In fact the only question left to the political sources we were speaking to in Rome by yesterday was whether Letta went easily today or with a brief and humiliating last fight. He wisely chose the former. When Renzi spoke today, he did not even pretend any more to offer Letta any option other than to step down – maybe with a little sugar, as we had been told, like a job as a Commissioner in Brussels.

Some names have also floated for possible new ministry positions, and the most interesting – and positive surprise – is Lucrezia Reichlin perhaps taking over the economy portfolio from Saccomanni. Reichlin has a doctorate in economics from NYU, has worked as an outside consultant for the ECB and was rumored to be in the race for a place in the board of directors of the BoE.

We would simply caution against over ebullience as the longer term constitutional reform, while perhaps easier to pass with Renzi in the driving seat, will still be tricky, and would suggest you take comments being made now within the party (and hinted at by Renzi himself) that the new movement could now last until 2018 with a big grain of salt.

This is Italy after all. And now that one deck has been cleared, we expect the next round of political speculation to be over the Presidency of Giorgio Napolitano, and at what point he feels his job as the shepherd of stability has been done and steps down into victorious retirement.

Nevertheless, as we also wrote yesterday’s “Coup for Stability,” we believe the coast may well now be clear until 2015-6 before new elections. And that should certainly be good enough for markets.

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