Italian politics: fire is out, but smoke still there
- Italian bond yields have come down, as the government has been approved by the president, but future policy remains very uncertain. Confrontation with the EU, reversing past reforms, expansion of fiscal deficit could again ignite fear and volatility. Risk of contagion to Spain, Portugal, and France.
- Italy is on a stronger economic footing, but public finances are still weak, and the banking sector still vulnerable. Weak growth prospects and ageing populations. Reforms badly needed, populists do not offer necessary solutions.
- Increased uncertainty regarding ECB policy normalisation. M.Draghi stepping down in 2019 will contribute to market reaction.
- Euro area fundamentals stronger than in 2011. Political risks will continue to affect market sentiment, may lower the pace of economic growth.
- Effects on Nordic markets if uncertainties prevail.
- Risk off, volatility in FI/FX markets, safe haven flows into Swedish bonds, weaker SEK (despite safe haven flows), limited effect on Norwegian and Baltic bond yields
- Contagion through European banking sector
- ECB policy response: Risk for low policy rates for even longer and extended QE program. Delay in rate hike from the Riksbank
- Slower Euro area growth risks dampening export demand and slows growth in home markets
For more information, please contact:
, Chief Economist Norway, phone: +479 9500392;
Laura Galdikiene, Senior Economist, phone: +370 52582275;
Knut Hallberg, Senior Economist, phone: +46 8 7009317.