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Italian President Rejects PM Draghi's Resignation Offer

Tyler Durden's Photo
by Tyler Durden
Thursday, Jul 14, 2022 - 05:59 PM

Update (1355ET): Italian President Sergio Mattarella rejected a resignation offer from Prime Minister Mario Draghi, according to a statement from the head of state’s office.

Mattarella invited Draghi to address parliament to assess the political situation after a key coalition party boycotted a confidence vote on Draghi’s government Thursday.

So what happens next? (Via Newsquawk)

One option, short of fresh elections, could be for PM Draghi to ask President Mattarella to allow him to attempt to form a new government without the 5-Star party: as this would allow the 5-Star to stick to its principles without collapsing the government that it retains overall confidence in (opposing just the crisis package), and for Draghi to enhance his credibility within the political sphere.

Such an option is possible as assuming the government ex-M5S remains intact, then they will control 175/321 Senate seats and thus retain a majority

However, this view is muddied by Salvini's League saying they are not willing to remain in the gov’t in the scenario that M5S quits - given they hold 60 seats their loss would erase the gov’ts ex-M5S majority.

No significant market reaction from this yet: modest EUR rally, FTSEMIB Futures just off the lows.

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Update (1250ET): Bloomberg is reporting that Mario Draghi has said he will resign.

Draghi reportedly told his cabinet that a government majority doesn't exist anymore and he will offer his resignation to the president.

The Euro dipped back below parity with the dollar...

And FTSEMIB Futures plunged...

Who could have seen that coming?

*  *  *

Update (0930ET): Well that escalated quickly. Despite winning the confidence vote, even as the Five Star Movement boycotted, Corriere is reporting that Mario Draghi is heading to meet with Italy's President, perhaps suggesting his resignation is imminent as he has apparently lost the coalition majority.

*  *  *

Italian stocks and bonds are reeling (yes, again) as political risk soars back to top of mind after the Five Star Movement set to boycott a key aid package vote, putting the survival of Prime Minister Mario Draghi’s government at risk.

Giuseppe Conte, the Five Star party leader and the second-biggest group in Draghi’s coalition, said he could no longer back Draghi’s cross-party government, which he accused of not doing enough to help families battered by spiralling food and energy costs.

“I have a strong fear that September will be a time when families will face the choice of paying their electricity bill or buying food,” he said after a day of frenetic political consultations.

Crucially, as The FT reports, the implosion of the national unity government, which could trigger earlier elections that were set for spring next year, would come at a sensitive time for Italy, which is expected to be the largest single recipient of the EU’s €750bn Covid recovery fund.

Draghi, who has been leading Italy’s technocratic government since early 2021, is expected to meet President Sergio Mattarella on Thursday afternoon, and could offer his resignation.

Other parties have indicated that they could call for an early election and that it was untenable for Draghi to remain in power if Five Star pulled out. In an interview with Italian paper Corriere Della Sera on 15 June Matteo Salvini, head of the rightwing League, argued that the government’s balance has moved “too much to the left” on many dossiers, such as taxes, pensions, immigration and justice.

“If a coalition party doesn’t back a government decree, enough is enough, it seems clear that we should go to elections,” said Salvini.

European Union Commissioner Paolo Gentiloni, a former premier of Italy, said the EU is concerned by the Italian situation.

As Rabobank's Michael Every notes, polls suggest that the far-right Brothers of Italy would come out on top if elections would be held right now. The worsening financial position of households only has strengthened their chances of winning such elections, since they are basically the only big opposition party.

Italy's FTSEMIB is Europe's worst-performing equity index this morning (led by its banking sector's weakness), breaking back below last week's lows back to its lowest level since Nov 2020 (notably over 19% below pre-COVID highs)...

The Euro is weakening further also (against the USDollar)

Additionally, and more problematically for The ECB, Italian bond yields (and spreads) are exploding higher...

...placing 'defragmentation' risks squarely back on the table.

Time for Christine to bail the Italians out again?

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