19 März 2018, 13:14 GMT
It is important to note that these results, while relevant, are not a surprise (see our previous blog post ‘Can a leopard change its spots?’).
Electoral polls have been showing a growing support for the more populist parties for quite a few months, and the Five Star Movement (M5S) has had a very strong following among the electorate for a while especially in the south of the country.
What was in line with expectations?
• A centre-right overall first coalition but short of the 40% needed to form a government;
• M5S as the first political party in the country;
• A poor result for Renzi’s democratic party.
What are the surprises in the post-vote maths?
• M5S over 30% is stronger than expected (it was expected at around 28%);
• The Northern League (LN or “Lega”) establishing itself as the largest party within the centre-right coalition also represents a surprise. The party appears to have taken most votes from Berlusconi’s Forza Italia (FI) - (LN and FI essentially swapped relative position versus what was expected in the polls ahead of the elections)
Where do we go from here?
A grand coalition is still possible but smaller, traditional parties are in a position of weakness and will have to strike a deal with the M5S or the Lega.
More importantly, even though the Lega and the M5S will have a greater say in the political agenda, the more extreme views from either party are likely to be tamed somewhat once they get into power.
Their anti-European rhetoric is already much softer than it was in the past, although they will place greater focus on fiscal easing, and a more confrontational attitude towards European partners.
The political horse-trading will now start and the first smoke will come for the election of the presidents of the chambers within the next three or four of weeks.
That would be something to watch, depending on the names that are chosen, it will give a lead on where the coalition talks are going.
The negotiators are not necessarily going to be the party leaders but more likely to be those close to the territory (and the votes).
Not a lot. At the time of writing BTPs are only few basis points wider, telling you that the market is not surprised by this outcome.
A coalition was considered a good outcome but the market preference was for one mainly involving the traditional parties.
Now, it looks increasingly unlikely that populist parties, and the M5S in particular, will be left out of a broad coalition given the election result.
Going forward, the exact market reaction would depend on how diluted M5S would be in such a coalition.
The softer their stance becomes as they negotiate with other parties, the better for BTPs - at least initially.
The market doesn’t like uncertainty, so it makes sense that the initial reaction might be a cold one until the fiscal path taken by the new government is better known.
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