Italy: Stress is here to stay

6/14/2018 - Report
ic_blogtagItalyElectionsGross Domestic Product (GDP)Financial assets

Italy - Photo by Karsten Würth on Unsplash.jpg


  • 88 days after the Italian parliamentary election, and an episode of exceptional financial market stress later, the Five Star Movement (M5S) and the Lega have sealed their governing alliance. Significant uncertainty remains however regarding the political and economic outlook. We defined four key political scenarios based on the fiscal measures implemented by the government and their relationship to the European institutions.

  • Baseline scenario (50%) assumes that the government implements only a portion of announced fiscal stimulus and finds a conciliatory approach with Europe.  Italian 10-year spreads to the Bund will remain between 180bps and 250bps. GDP growth would more than halve by 2020 to 0.6% with debt-to-GDP embarking on an upward trend to 134% by 2020.

  • Upside scenario (30%) foresees the implementation of limited fiscal measures while the government maintains a constructive approach towards Europe. Spreads would still be elevated with less volatility, GDP growth would moderate to 1% in 2019/2020 while public debt stabilizes at 132% of GDP.

  • Downside scenario (15%) assumes a sharp rise in fiscal spending with the coalition embarking on a collision course with the EU. Spreads would rise by an additional +200bps compared to the baseline; Italy could slip in a shallow multi-year recession with debt rising above 140% by 2020.

  • Italexit (<5%) assumes that a political event or a market default, combined with a confrontational stance causes substantial financial stress (spreads up by +500bps to the baseline). Italy would undergo a very deep recession with debt-to-GDP rising towards 160% by 2020. Contagion would follow.