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Euromoney Country Risk

Italian political drama predicted by country-risk experts

The appointment of Matteo Renzi as Italy’s new prime minister highlights the problem of consensus policymaking that has been worrying risk experts for some time.

The latest political crisis in Rome sparked by the resignation of the centre-left Democratic Party and coalition premier Enrico Letta – appointed to office less than 10 months ago – has invariably undermined Italy’s country risk profile, pushing its total risk score down to 54.55 out of a possible 100 points in recent days.

The sovereign had shown slight improvement in Q4 2013, mostly driven by the anticipation of a nascent economic recovery, with confidence gradually returning.

However, the reversal means the sovereign is back where it was in March last year, languishing in 55th place on Euromoney Country Risk’s global rankings – below the mid-point of the third of ECR’s five tiered rankings containing 186 countries worldwide.

Widely feared

This latest episode of instability had been expected, highlighting the complexities of Italian politics – characterized by unstable coalitions – and the tail risks attached to the eurozone’s crisis management from the passage of reforms.

Of all Italy’s risk factors downgraded last year by economists and other experts taking part in the survey, the worst performer was government stability, reduced by 0.3 to a lowly 4.7 out of 10. Risk scores had also been falling consistently before that.

Francesco Galietti, chief executive officer of Policy Sonar, a consultancy, states: “The coming days will be dedicated to damage control and to marketing the transition from Enrico Letta to Matteo Renzi.”

However, without elections there are considerable risks – one of the main ones being it could be difficult for Renzi to maintain ties to Silvio Berlusconi and at the same time obtain support in the Senate from the left-fringe SEL senators.

Galietti argues this is crucial because “Renzi attaches great importance to his capacity to transform the current legislature into a ‘costituente’, ie a grand coalition, that rolls out several long-needed reforms that require a large political consensus rather than going for early elections.”

However, the handover faces disapproval from electors that tend to view non-elected premiers with disdain, and which could see Beppe Grillo’s populist Five Star Movement (M5S) wage a campaign against what it considers a violation of democracy, framing the Letta-Renzi handover as “a soft putsch orchestrated by the establishment”, Galietti warns.

The M5S has caused mayhem these past weeks, calling for the impeachment of president Giorgio Napolitano and creating conflict with lower-house speaker Laura Boldrini on a range of contentious issues connected to Italy’s reform programme.

Several question marks hang over Italy’s risk profile, including what might happen to policies started under Letta’s watch, whether Berlusconi will support the Renzi government, or if any support will come from the radical left MPs, among other issues related to the cabinet formation, appointments to state-owned enterprises and civil-service assistance.

This article was originally published on Euromoney Country Risk (ECR), the global country rating service from Euromoney. To find out more, register for a free trial at Euromoney Country Risk.

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