Octogenarian rekindles Italian hope

April 22, 2013


The big euro zone development over the weekend was the re-election of ageing Italian President Giorgio Napolitano for a second term. The presumption is that to put himself through this again he must have got pretty serious expressions of intent from the warring political parties that they will strive for some form of grand coalition. That may have been made easier by the resignation of centre-left leader Bersani who was in danger of splitting his own caucus.

If that comes to pass it should push back the timing of fresh elections until next year at least, a welcome turn for markets which feared a new poll could result in an even more fractured outcome and put more power in the hands of the anti-establishment Five Star movement. All that means we should see a significant rally in Italian assets today. That should also benefit other peripheral euro zone bonds. Safe haven German Bund futures have already dipped at the open, Italian bond futures have leapt almost a full point and European stock futures are pointing upwards.

87-year-old Napolitano will address parliament later and could either rush through consultations with the parties or skip that step altogether since he’s already heard from them ad nauseam.

The G20/IMF gathering over the weekend may not have achieved much but there was a growing consensus that monetary policy alone will not put the world economy right and that the time has come to focus more on growth rather than cutting debt. Even the euro zone’s representatives seem to be on board. European economy chief Olli Rehn told Reuters that the pressure the G20 and IMF have put on the euro zone to ease up on austerity is “preaching to the converted”. The currency bloc, he said, would stretch its fiscal consolidation efforts over time in order to foster some growth.

The European Central Bank’s pledge to save the euro has certainly bought some time and it looks like the focus will switch, at least incrementally, to structural reforms aimed at boosting competitiveness rather than slavish debt-cutting. But the bottom line is that until or unless the euro zone gets serious about banking union again, putting in place the structures that will give the stronger banks confidence to lend, the crisis will not be solved. In Washington, the G20 urged the EU to complete its banking union with urgency but Berlin is now saying it will require treaty change – something that could delay it for years.

Today, we get the 2012 debt and deficit numbers for euro zone members to remind us how far there is to go on that front. Angela Merkel, Jose Manuel Barroso, Herman Van Rompuy and others are all out and about on our patch and a clutch of euro policymakers are still in the United States and due to speak.

Also in Washington came indications that British finance minister George Osborne will seek to extend the Bank of England’s funding for lending scheme, whereby banks can get their hands on 80 billion pounds of cheap credit if they promise to lend it on.

It seems, having been downgraded by a second rating agency on Friday, that the government is trying to avoid any criticism from the IMF of the balance between efforts to foster growth and cut debt when it delivers its annual report on the UK next month. The lending programme has underwhelmed so far and first quarter GDP figures later this week could show Britain has succumbed to a “triple dip” recession. That adds up to about as perfect a political storm as you can get.

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