“Mario Draghi’s resignation as prime minister of Italy after a split in his national unity government heralds greater political uncertainty even if early elections are avoided.”
This was stated by the rating agency Fitch in a note. “The short-term implications for economic and fiscal policy depend on political outcomes, but structural reforms and fiscal consolidation are likely to become more challenging,” he adds.
“Recent developments are broadly in line with our long-term view that the divisions between coalition parties that support the unity government, which took office in February 2021, may widen as the next general election approaches ( expected by June 2023), potentially undermining the government’s political agenda, “writes Fitch. According to the rating agency, the political consequences “are not clear”, but “whatever happens, Italy is about to enter a period of political uncertainty after 18 months of relative stability and the implementation of some reforms. Draghi would remain prime minister, we expect the parties that support him to seek greater visibility on some flag measures as the elections approach, expanding the current tensions “. “We also expect them to exert pressure for greater fiscal easing in the next budget law. On the contrary, if we go to the vote immediately this would make the time schedule for passing the budget law extremely tight. And it would make it more difficult for Italy to hit the targets for the next tranche of NextGeneration Eu funds in December, or it would weaken the authorities’ ability to distribute the funds already received. ” The government’s current budget plan sets the consolidation beyond 2023 and Fitch expects a deficit greater than that estimated by the government for this year (5.9% of GDP, against 5.6%), while for next year estimates a “modest reduction” in the deficit to 4.5% of GDP (the government expects 3.9%), concludes the note, in which Fitch confirms Italy’s rating of May 27 at BBB.
The outcome of tomorrow’s vote of confidence in the government “is highly uncertain, but recent events are negative for credit and increase the risk of early elections”. Although Draghi will remain premier, “the implementation of policies will be more difficult in view of the elections, especially for the policies necessary to unlock the third installment of the EU’s recovery funds”. Moody’s writes that “The government could also find it difficult to find an agreement on the 2023 budget, which it will have to present to the European Commission by October, or on policies to manage the risks associated with Italy’s dependence on Russian gas “.
In a comment sent to investors, which ANSA was able to see, the rating agency predicts that “the government will fight more and more to reach the fundamental stages of the reforms”. Furthermore, it says, “the challenges will grow because the objectives of the National Plan for Recovery and Resilience (PNRR) will become more quantitative from 2023 onwards, leaving less room for interpretation”. According to Moody’s, “the decrease in the momentum of investments and reforms this year will weaken the economy while a potential shutdown of gas from Russia poses material risks for Italy’s economic activity”. The rating agency therefore recalls that in May it revised Italy’s growth forecast for 2022 to 2.2% from 4.3% before the invasion of Ukraine (negative Caa3). “The return of political instability and the failure to achieve Pnrr targets is likely to weaken investor confidence at a time when the government needs investors to play a greater role in the Italian debt market in the context. the normalization of the monetary policy of the European Central Bank “. In light of this, Moody’s concludes “the rise in borrowing costs will begin to reverse the improvements in debt accessibility we have seen over the past decade, although interest costs will remain low by historical standards.”
Source: Ansa
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