Italy: Government Instability Brings Risk To Pandemic Management and Recovery Plan Implementation

DBRS Morningstar released a commentary titled ”Italy: Government Instability Brings Risk To Pandemic Management and Recovery Plan Implementation”

Former Prime Minister Mr Renzi’s decision to withdraw its party’s (Italia Viva, IV) ministers from Mr Conte’s cabinet is generating uncertainty. A political compromise is likely to be found but DBRS Morningstar's concerns lie with pandemic management as well as the implementation of the national Recovery and Resilience Plan (RRP) to boost Italy's recovery.

DBRS Morningstar does not expect current developments to lead to snap elections but an agreement with Mr Renzi seems challenging at the moment and Mr Conte is expected to ask for the confidence vote in the Chambers. In case of an agreement with IV, it is unclear whether the potential same majority could be reinforced and become more cohesive and reform-oriented, unless a new agenda is defined and shared among all the supporting parties. Conversely a weak and less cohesive majority that lacks a clear agenda in order to avoid early elections before the end of the term in 2023 could undermine the capacity of the government to implement further legislation and to achieve objectives included in the RRP.

“A cohesive and stable majority is instrumental to manage the pandemic, make progress with reforms and implement projects outlined in the RRP. These are key to raise Italy’s GDP potential after years of sluggish growth” said Carlo Capuano, Vice President, Global Sovereign Ratings. A slower recovery hampers the ability to reduce the very high public debt level in the medium-term and this could weigh on Italy's rating (BBB (high), Negative trend).
Other scenarios include a government externally supported by other MPs and/or Forza Italia (FI) or a government of national unity to at least manage the current pandemic before elections. While DBRS Morningstar thinks it unlikely, should instead snap elections occur, an alternative League-driven centre-right government is likely to win if opinion polls prove correct. A new government supported by another majority could see the RRP renegotiated among parties generating a further delay, while in case of elections the current RRP could be still presented now but a new parliament might have a different set of priorities.

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The commentary titled ”Italy: Government Instability Brings Risk To Pandemic Management and Recovery Plan Implementation” is available at www.dbrsmorningstar.com.

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