MacroScope

Renzi’s moment

By Mike Peacock
February 17, 2014

Italy’s president will meet centre-left leader Matteo Renzi today and is likely to ask him to form a government following the ousting of Enrico Letta as prime minister.

Renzi will need to reach an agreement with the small New Centre Right party to continue the current coalition and there is common ground. The 39-year-old has already said he backs lower taxes affecting employment, but they differ on issues such as immigration and laws allowing gay and lesbian civil partnerships.

A lot is at stake. Italy needs a strong government that can push through much-needed economic reforms but needs to pass a new electoral law first to allow for more durable administrations in future.

Renzi has struck a deal with centre-right leader Silvio Berlusconi which could ensure passage of a new law intended to favour large coalitions and ensure stable government over a full term.

The smart money had expected Renzi to wait in the wings, allowing Letta to do all the heavy lifting and then move to take over once an electoral law was in place. But it appears he lost patience with the slow pace of reform. Whether that is a smart move remains to be seen.

A lot of hope is invested in the 39-year-old centre-left leader and his ability to act as a new broom and sweep clean the Italian political stable. Now he is likely to head a fragile coalition. The New Centre Right has already said it wants concessions on policy and many of Renzi’s ideas have yet to be fleshed out.

Nonetheless, ratings agency Moody’s lifted its outlook on Italy’s credit rating to ‘stable’ from ‘negative’ late on Friday, citing resilient financial strength, sinking funding costs and diminished risk the state may have to use resources to help recapitalise its banks.
Italian bond futures have opened higher.

Chancellor Angela Merkel’s coalition government has been rocked by the sacking of a conservative minister on Friday over his handling of confidential information about a looming inquiry into an SPD lawmaker suspected of possessing child pornography.
The issue has split Merkel’s two-month-old coalition just as it was trying to enact urgently needed pension and energy reforms.

Euro zone finance ministers meet in Brussels. The Eurogroup will keep a weather eye on the emerging markets ahead of new European Commission economic forecasts later in the month, although they have calmed over the last week or so. Cyprus – grinding through its bailout programme – and Greece will be up for discussion.

The EC/ECB/IMF troika is still negotiating remotely with Athens after months with disagreement, with the lenders worrying over a hefty gap in Greece’s financial plan and Athens refusing to countenance more austerity measures.

There is little doubt that more help will in the end be forthcoming to cut its gargantuan debt and the Greek government’s reporting on Saturday that its primary budget surplus for 2013 came in much higher than estimated may unlock the door. Under the terms of its 240 billion euro bailout, Greece was supposed to reach a surplus only in 2014.

The ability of the euro zone’s ESM rescue fund to directly recapitalize banks is also likely to feature in Brussels.

The Ukrainian currency could be vulnerable. Ukraine’s central bank imposed capital controls to underpin the hryvnia but from today, importers will be allowed to buy dollars again after a 5-day ban, which might push the currency beyond a 5-year low hit earlier this year.

Ukrainian opposition protesters ended a two-month occupation of city hall in Kiev on Sunday and opened a road to limited traffic, meeting an amnesty offer aimed at easing a stand-off over President Viktor Yanukovich’s rule. Riot police were, in turn, withdrawn. That hasn’t dampened the opposition whose leaders demanded Yanukovich abandon “dictatorial” powers and let them form a government independent of him.

Yanukovich also has to name a new prime minister which has to go to parliament for approval. If he names a hardliner, streets protests could explode again.

In the space of a few days the Scots have been told by the big three British political parties that they can forget the pound if they vote for independence and, by European Commission President Jose Manuel Barroso, that they can probably forget EU membership too.
A new member requires unanimous support from the 28 already in the bloc and it’s hard to see Spain, for instance, giving its separatist-minded Catalans cause for hope by allowing the Scots to join. The Scottish Nationalists’ initial response – that Barroso’s analysis was “preposterous” – looks weak. They will doubtless return to it today.

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