Political Uncertainty in Italy after the rejection of Mario Draghi’s resignation offer

Mario Draghi has resigned. For the time being, however, he remains Italy's prime minister. The President of the Republic, Sergio Mattarella, has not accepted Draghi's resignation and has urged him to appear before parliament to confirm whether he still has a majority to govern and remain prime minister.

The former president of the ECB convened a Council of Ministers meeting last Thursday following the crisis in the coalition government over part of his cabinet made up of members of the 5-Star Movement (M5S). However, Draghi - who had already hastily left the NATO summit in Madrid in the face of his government's plight - eventually announced his resignation after the M5S abstained in a motion of confidence in the Italian Senate against the prime minister.

Now, Mattarella has declined this option, forcing Mario Draghi to re-evaluate his support. Against this backdrop of political crisis in Italy, Alvise Lennkh-Yunus, Deputy Head, Sovereign and Public Sector ratings, at Scope Ratings, commented that Heightened political volatility is credit negative for Italy (BBB+/Stable) if it results in a prolonged period of uncertainty that prevents a government – with or without Prime Minister Mario Draghi – from managing the current energy and gas crisis, ensuring fiscal targets are met in line with the expected gradual consolidation, and continuing to implement the reforms on which Next Generation EU disbursements are conditioned. He also mentioned that this is critical to raising the country’s medium-term growth potential and thus ensuring the sustainability of Italy‘s public debt.

He continues saying that In case of early elections, Scope ratings believes that the heightened political fragmentation reduces the likelihood of a political majority emerging with an agenda that reverses the agreed policies and investment plans of the Draghi government.

The expert adds that the prospect of significant EU funds over the coming years should provide all parties with an important incentive to broadly continue implementing the agreed targets and milestones with the European Commission, regardless of the government that ultimately emerges from this transition period.

Mr. Lennkh-Yunus finished saying that Italian political crisis will likely complicate the ECB‘s decision-making process related to its anti-fragmentation tool, adding to market volatility and thus adversely impacting the government‘s cost of funding.

Also commenting on the topic, Peter Allen Goves, Fixed income analyst at MFS Investment Management says that Draghi’s resignation comes as a market surprise and injects some fresh political uncertainties for BTP spreads to contend with. The next focus for markets will be the 20th July when Draghi addresses Parliament which could hold the key regarding the future of any potential government.

He adds that It is plausible Draghi can remain PM or a new technocratic government is installed. And highlights that this situation complicates matters for the ECB either way. The analyst advise to remain cautious on such spreads for the near-term.