• On Italian politics, we see mostly two scenarios before year end: 

President Mattarella’s strategy to make Euro exit a clear and decisive campaign issue in the next elections is efficient, PD and FI could boost their score and reverse the current trend; with a possible Lega-FI coalition or Lega-FI-PD coalition. Believe it or not, Mr. Berlusconi could be a key man in those discussions.

President Mattarella’s strategy fails and both Lega and M5S would be reinforced and ultimately in power. We view this scenario as the more likely

  • What would a M5S-Lega coalition mean for Italy and Europe?

Euro-membership is not a major worry and room for fiscal expansion is limited. Momentum for Italian reforms and European Banking Union would clearly slow down and the ECB’s exit strategy remains very slow (and could be slowed again because of this.)

Despite all the uncertainties, the genuine systemic risk linked to Italy (i.e. Euro exit) seems low. It is likely that (very much like in Greece) the populist government would prove to be a failure (after a few years) and more mainstream parties would come back in power.

  • The dramatic moves in BTP obviously raise the question of who is exposed to Italian public debt?

The combined exposure of European banks to Italian public debt is 293bn€. Unsurprisingly, the main systemic holders are UniCredit and Intesa, both strong banks. Even with an across the board 20% drop in bond prices, the impact for e.g. Intesa would be limited to ~350bps (before tax shield.) We believe these impacts are manageable considering the current buffer these banks have against their minimum CET1 requirements.

Italian banks’ financial strength could be impacted by indirect effects (NPLs could be more difficult to sell and credit quality could deteriorate) but NPL buyers take a long-term view and the Italian economy has been performing well over the past quarters. According to the BIS, Italy is one of the less likely candidates for banking stress currently.