Forex Flash: Italian President Napolitano buys time but uncertainty rises - Nomura

FXstreet.com (Barcelona) - Nomura economist Silvio Peruzzo notes that Bersani´s attempt to form a government failed and Napolitano assigned the task to work on a policy agenda to ten “wise men”, exploring the possibility of forming a government.

He feels that while outsiders judge such a decision as being more market friendly than new elections, the bottom line is that after more than a month from the national elections, there is no government in place in Italy and all scenarios are still plausible, including new elections.

He adds that in the short term, the new parliament is likely to clear the way to pro-growth measures, to start with the payment of pending commercial debt of the public administration, this could mitigate loss of confidence in the short term as investors could wrongly conclude this means that the country is still operational. Further, given Bersani‟s failure to form a government the hurdle to forge a political coalition government is very high, especially for the centre left. He writes, “Our expectation is that the major political parties could still converge around a selected number of policy items identified by the “wise men.” If this does not happen within the next 10-15 days, then new elections would come in June/July.”

Overall, he notes that the situation remains very fluid and so far the political developments have been worse than anticipated. He writes, “We continue to believe that the Italian bond market is mispricing the political uncertainty and we retain our bias for higher sovereign bond yields.”