DBRS Morningstar: Italy - Draghi Reassures For Now

Italy’s government instability finally draws to a close for now with the formation of a new government supported by a wide majority. This provides welcome stability for the government to manage the health crisis, accelerate the roll-out of the vaccine, place Italy on a recovery path and initiate important reforms. DBRS Morningstar views this development with cautious optimism in relation to Italy’s sovereign ratings (BBB (high), Negative Trend).

After an unsuccessful attempt to find a new and stable majority to sustain the government of the former Prime Minister Mr Conte, the President of the Republic tasked the former President of the European Central Bank (ECB), Mr Draghi, to form a new government. A new government was formed and sworn in on Saturday 13 February 2021 and obtained confidence votes in both chambers in the last two days.

Prime Minister Draghi’s cabinet includes experts placed in key ministries and politicians from almost all parties. The latter has enabled the cabinet to receive large although heterogeneous majority support that strengthens consensus, government stability and could facilitate the passing of reform legislation. Moreover, Mr Draghi’s institutional profile reinforces Italy’s credibility and political accountability ahead of the presentation of the national Recovery and Resilience plan (RRP) to the European Commission (EC).

Prime Minister Draghi’s agenda will be focused mainly on:

--accelerating the roll-out of the vaccine;
--addressing the consequences of the health crisis including education and the labor market;
--supporting Italy’s economic recovery;
--and presenting a new RRP with important initiatives comprising public administration, tax and justice reform, promoting the green transition, digitalization and gender equality. DBRS Morningstar views positively possible general consensus from the parliament on these reforms included in the RRP as it may indicate that enacting reform legislation might be continued beyond the end of the current legislature in March 2023.

DBRS Morningstar takes the view that Prime Minister Draghi might have a time window to implement those measures that could strengthen the recovery, including initiating important reforms aimed at boosting Italy’s potential GDP. This would benefit public debt sustainability. Nevertheless, reform effort will need to continue well beyond Mr Draghi’s government. The new cabinet is expected to govern at least until the election of the President of the Republic, to be held in early 2022, and Mr Draghi’s election as President is one possibility. In this case, parliamentary elections are likely to be held before the end of the legislative term in March 2023. On a more cautious note, as the probability of elections increase, frictions among those parties sustaining the government could rise and weaken Mr Draghi’s policies and undermine the enacting reform legislative process.

“The new government has reassured investors that were concerned over snap elections and still latent euroskepticism stemming from Lega. It is not clear, however, if Prime Minister Draghi will have the time to address completely those structural weaknesses that constrain Italy’s potential. It remains unclear whether or not this phase shapes a political future with more consensus than in the past, with increased appetite for reforms and a view to more forward looking policies. These are key factors in our view,” said Carlo Capuano, Vice President at DBRS Morningstar.

Notes:
The Press Release titled “Italy - Draghi Reassures For Now” is available at www.dbrsmorningstar.com.

For more information on Italy, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500
Gerente de DBRS Ratings GmbH, Sucursal en España: Detlef Scholz
Representante legal y Responsable de la oficina de Madrid: Zulema María Aragonés Monjas